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  • Writer's pictureIshfaaq Peerally

When will the Stock Market Crash?

Many people are saying that the stock market $SPX500 is in a bubble but usually when there is a bubble, we don't know about it. Only after it has bursted that we can say that there was a bubble. Even though stocks are overpriced, maybe the stock market will just keep going up. Nobody knows when the market will crash but we can always look at different scenarios.

Politics will certainly affect the stock market this year as there are presidential elections, Donald TRump vs Joe Biden. The stock market doesn't seems to have a problem with either presidential candidates but we can expect more anticapitalist regulations such as higher taxes if Biden wins and the Senate and House have a Democratic majority. But even a 100% Republican Administration may impose higher taxes. There's no certainty in that.

But the most effects on the markets doesn't come elected officials but from the Fed. Fed chairman, Jay Powell has more influence on the markets today than the president. We need to look at situations in the past when the Federal Reserve System was printing a lot of money. For example, after the 1929 Great Depression and Franklin Roosevelt (FDR) abolishing the gold standard $GOLD in 1933, the Fed printed a lot of money. The stock market crashed again only in 1937 after tightening of monetary policies. If the Fed stops printing money and raises interest rates, we may have a second crash.

Another interesting crash we need to look at is that of 1973. In 1971, Richard Nixon abolished the gold standard again in what is known as the Nixon shock. After that stocks went up. Since cash is worthless, the money has to go somewhere and investors bought stocks. The crash only happened in 1973.

Is it possible that the stock market crashes this year itself before the elections? If corporate earnings are disappointing, then a crash may happen in 2020. Most of the gains of the S&P 500 are from only a few companies, mainly on the NASDAQ. Apple $AAPL , Microsoft, Amazon, Google and Facebook are more than 20% of the markets. If any of these companies have bad earnings, a crash may be triggered. It is also possible that these tech companies will be troubled by antitrust probes. If one of these tech companies crashes, everything crashes. They are correlated with each other with all the indexing, ETFs, passive investing and algorithmic trading.

What is important it to look for great companies at discount prices. It is a little harder but it is still possible. In the long-term, it doesn't really matter when the markets will crash, what's important is which companies you have in your portfolio and to buy them at the right price.

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