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Stock market crash: when will the ‘bubble of everything’ burst?

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It’s September, so we are entering the final third of 2021. Also, it’s been 18 months since the Covid-19 pandemic went global, causing a temporary collapse in financial markets. But the returns produced since March 2020 have been so huge that I can scarcely believe them. When coronavirus went worldwide in February 2020, half of my family portfolio was in cash. Last year’s stock market crash peaked on ‘Meltdown Monday’ (23 March 2020). Shortly afterwards, that dormant 50% was fully invested again, mostly in the US.

I’m still worried about a stock market crash

Today, the S&P 500 index is up 106.6% — more than doubling — from its 2020 intra-day low of 2,191.86 points. This has delivered a life-changing sum to my family. Despite this enormous wealth boost, I am increasingly worried about the next stock market crash.

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In 35 years as a value investor, I’ve lived through four great stock market crashes: 1987, 2000/03, 2007/09, and 2020. But when I view financial markets today, I see a ‘bubble of everything’. Like ex-GMO fund manager and market bear Jeremy Grantham, I see “an epic bubble”. As Grantham added, he sees “extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behaviour”. For instance, take US stocks: the S&P 500 has gained in nine of the past 12 years and is up more than a fifth (20.6%) in the past eight months. Since the market low of March 2009, the S&P 500 has returned 16.6% a year compounded (and that’s excluding dividends). Since 1957, the long-term return from this index has been roughly half that. Make of this what you will.

We’re relying on perfection

Right now, stock and bond markets (and US and UK house prices) are defying financial gravity. And don’t get me started on cryptocurrencies, Tesla stock and the like! But can they continue to keep rising? Or will a collapse be the inevitable conclusion, as has happened so many times in the past century? For the record, I don’t think we’ll see a stock market crash in 2021 or early 2022. That’s simply because a vast wave of money keeps piling into stocks, helping to support share prices. Also, with monetary policy highly accommodative in the US, UK and Europe, central-bank policy is highly helpful to markets. Likewise, ultra-low interest rates help over-indebted companies to struggle on regardless.

However, I am expecting a US stock market crash in 2022, perhaps of between 10% and 20%. I see too many moving parts that need to stay in perfect harmony to keep this ball rolling. These include: economic growth, sustained over-valuations, corporate earnings, higher inflation, rising bond yields, Covid-19 variants, policy mistakes, etc. Nevertheless, while the good times keep rolling, I’ll keep investing.

I see UK shares as a real bargain

Earlier, I said that I’m convinced that we’re in a bubble of everything. But that’s not strictly true. In fact, I regard our home stock market here in the UK as a relative haven in a world of excess valuations. Indeed, by many measures — cash flows, profits, earnings per share and dividends — the FTSE 100 index is rather cheap in historical terms. Last autumn, it was trading close to 50-year lows, yet it’s only up just over a fifth (+20.4%) in 12 months. Hence, my buying will be directed towards cheaper London-listed shares. Even though a US stock market crash would send UK shares tumbling, I think buying British is the sensible choice for me today!

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Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services, such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.

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