Wellian Weekly 01.11.2021

Is a stock market crash imminent?

It would seem that everyone is nervous about investing today and that a stock market crash is imminent. Headlines are flooded with negative news, market valuations are at all time highs, and billionaire investors are coming out predicting the next stock market crash is just around the corner. But is it really?

Looking back in history, there is nothing new about that. Over the last ten years, investors have always been nervous about something that they have read or seen in the news. Could the headlines at the time been as bad as they are now? Looking back at some of those events, how serious did they seem at the time?

  • In 2012 we had the European Sovereign Debt crisis where Greece almost went bankrupt and took the rest of Europe with it
  • In 2013 we had the Taper Tantrum where the US Government started to reduce the amount of money it was pumping into the markets and there were inflation fears
  • 2014 saw the first US Government Shutdown where the US government was days away from closing its doors
  • In 2015 the Chinese stock market crashed by over 45%
  • 2016 saw Brexit, the biggest event to have happened to the UK and the European Union since its beginning
  • In 2018 we had the Trade War, as Trump kept threatening to put higher tariffs on China
  • And in 2020, of course, we had the Coronavirus pandemic seeing global stock markets fall sharply over a period of a few weeks

 

With each of these events, newspaper headlines read like the end of the world was just around the corner. But every single time, fears were overblown, and stock markets recovered. Since the end of the Global Financial Crisis, the S&P 500 is up by over 500%, despite all the fears and pessimism that has existed over that time.

So why did all these events seem so serious if they are likely to just blow over in time?  Much of that is because negative news sells, so with newspapers headlines and television news reports all saying the same thing, it makes you believe that the world is in a much worse state than it actually is. We are now bombarded with negative news from across the world 24/7, and it is turning us into anxious investors, when actually we are living in the most prosperous time of human history.

We also have some of the smartest economists and successful investors coming out predicting stock market crashes. Surely they know what they are talking about? But for every famed investor predicting a crash, you can find 20 others that aren’t. How many times have we seen the big calls being made, only to be found to be completely wrong despite all of their convictions? However, before you go acting in the words of your favourite fund manager, you can often find that their message has been taken out of context to grab the next headline, meaning the message often gets distorted. There is a big difference between a passing comment compared to what actually gets fed into their investment strategy.

You also have to remember that they are all trying to sell you something. By getting their message out, they are either trying to connect to potential investors who are also feeling nervous about the market and so will invest in their defensively positioned fund, or there are those who are predicting the bull market will go on for another ten years and want you to invest in their bullish growth funds. One way or another, it’s all a form of marketing. When putting these events into context when investing, it might be worth remembering the famous Warren Buffet quote “Be fearful when others are greedy and greedy when others are fearful”.

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