Should You Worry About Another Market Crash?
Every October, stories about crashes occur. Last week, for example, was the 33rd anniversary of the 1987 crash.
Among the interesting retrospectives was an article on MarketWatch called, “Many stock investors are too young to remember Black Monday in October 1987 — why that’s a problem.” Its subject is apparent from its title – those who fail to remember history are doomed to repeat it.
The article also included a summary of recent research showing we should expect another day like Black Monday within the next century. The Dow Jones Industrial Average lost 22.6% that day. Researchers found we should expect another crash like that within the next 100 years.
Also, within the next hundred years, we should expect the author of that MarketWatch article to remind us of this paper again. He seems to do that often in October. The next chart is from a 2013 article by the same author that appeared in the Wall Street Journal.
Source: Wall Street Journal
Why This Matters (Or Doesn’t)
I’m highlighting this for two reasons.
First, if I start recycling ideas, be sure to call me on it. Financial markets move every day and there is fresh economic data every week. There is no reason to review the same material with you over and over again.
Second, we should expect a one-day decline of at least 5% about every other year. We won’t see that. Instead, we will see a number of days with 5% declines cluster in a relatively short timeframe. Earlier this year, we saw six days where the S&P 500 fell at least 5%.
Does that mean we should base our investment strategy on the fact that there is likely to be a day with a large loss at some point in the next few years? I don’t think so. While I believe it’s important to have a sense of history, I don’t think we should focus on the worst episodes in history.
Instead, I believe we should base our strategy on time-tested principles that are focused on the shorter term.
In the shorter term, I continue to expect volatility. Specifically, I expect to a volatile and tradable trend develop after the election.
That is what we saw after the 2016 election.
It’s also what we saw after the 2012 election.
In case you are expecting an uptrend, it’s important to remember how the stock market reacted to the results of the 2008 election.
Of course, this upcoming election could be similar to the 2000 election in the sense that we might not know the winner for some time.
The common theme in almost all election years is that the trend accelerates after the election. In 2000 and 2008, elections were held in the midst of bear markets and stock sold off after the elections. In 2016 and 2012, elections coincided with bull markets.
That brings us to this year. Prices of major stock market averages are at new highs, yet, to many investors, it feels like we are in a bear market.
The S&P 500 is above its 200-day average. Assuming we have a winner on election night, I expect to see a tradable uptrend develop. However, the election is not until next week. We could see volatility this week with both big up days and down days.
However, it’s also possible we will not know the winner election night as mail-in ballots could take days to count. If that’s the case, volatility could continue until the winner is clear.
It will be an interesting two weeks, but I believe with a short-term focus and a sense of market history, the next few weeks will be tradable.
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