It’s hard to avoid an article with the headline: “Stock Market Crash of 2016: The Countdown Begins.”
While many seasoned consumers of financial journalism might be inclined to dismiss an article with such a bombastic headline right off the bat, I’m always willing to at least consider the arguments behind such a claim.
If such as crash is a year off, it’s important to start preparing. A 50% decline in stock-market value is a sharper drop than we endured in 2008.
Fortunately for long investors everywhere, there is little about the article that should send anyone cashing out of stocks and heading for the hills.
To be sure, Farrell got my attention when he invoked the words of Jeremy Grantham, the highly respected professional investor. (And a person whose commentaries appear quarterly in Barron’s Wall Street’s Best Minds column.)
Grantham has written that “around the presidential election or soon after, the market bubble will burst, as bubbles always do, and will revert to its trend value, around half of its peak or worse.”
Of course, even if there is some truth to this thinking, what’s to say that stocks won’t start correcting more gradually long before 2016. In addition, is it outside the realm of possibility that a combination of easy-money global central-bank policy, economic improvements here and abroad, and other unforeseen factors could keep stocks going, or at least mitigate the kind of severe decline that both Farrell and Grantham are calling for? We still have 10 months to go before we even get to 2016.
In making his case for a crash of 2016, Farrell writes that investors are in a state of denial about how bad things can get. But today’s investors aren’t behaving as bullishly as their counterparts in 2000 and 2007, two recent market tops. Also, it’s hard to imagine what catalyst may emerge in the next year that could be as terrible for stock values as the bursting of a tech bubble or a financial crisis brought about by an overinflated housing market.
The bigger issue on trial here is the idea that investors should make big asset bets based on bold market forecasts, whether by professional money managers or journalists.
On that score, Motley Fool columnist Morgan Housel has written a decent piece looking at just how “disastrously bad” the predictions of Wall Street strategists have been since 2000.
“Some quick math shows the strategists’ forecasts were off by an average of 14.7 percentage points per year,” when compared to the actual results of the Standard & Poor’s 500, he writes.
Seems to me that rather than girding for a coming 50% crash, the better approach for investing in the current stock market is provided by CNNMoney’s Matt Egan.
Egan discusses the dangers of pulling money out of the stock market in anticipation of a crash versus riding out a storm. “Even if you have terrible timing and jump in right before a market crash, you would still recover your money relatively quickly,” he writes. “For example, people who invested $1,000 in the S&P 500 at the beginning of 2008 and again at the start [of] 2009 were back in positive territory by the end of 2009, according to a new analysis by financial technology firm CircleBlack.”
“Sure, they suffered steep losses (and likely lost some serious sleep) as stocks cratered during the financial crisis,” Egan writes. “Yet they also enjoyed a dramatic rebound in U.S. stocks as the system stabilized. The S&P 500 is up over 200% since the bottoming out in March 2009.”
He adds that it may be tempting to stay on the sidelines. However, holding too much cash for fear of a market crash will almost certainly cause you to miss extended periods when markets perform well.