In 35 years of investing, I’ve hardly ever seen US stocks perform as they did in 2019-21. Despite the worst global pandemic in a century, the S&P 500 has climbed three years in a row. The index soared by 28.9% in 2019, jumped by 16.3% in 2020 and surged by 26.9% last year. And these gains exclude cash dividends. Furthermore, in the past 10 years, the S&P 500 has recorded only two losing years: -0.73% in 2015 and -6.24% in 2018. Hence, after a decade of near-unstoppable gains, I’m increasingly worried about the next stock market crash.
Stock market crash: when bubbles burst
The last time I remember stock markets being this exuberant — even feverish — was in 1995-99. During this half-decade, the S&P 500 index rose every year for five years. These returns (excluding dividends) ranged from a high of 34.1% in 1995 to a low of 19.5% in 1999. These were the so-called ‘dotcom boom’ years, when investors were seemingly willing to pay any price to buy into technology, media and telecoms (TMT) stocks. Alas, just as night follows day, the dotcom boom turned into the TMT bust. During the 2000-03 stock market crash, the S&P 500 lost 10.1% in 2000, 13% in 2001 and then crashed by 23.4% in 2002. From peak to trough, the S&P 500 lost more than half of its value (-57%), while the tech-heavy Nasdaq index crashed by 78%. Yikes.
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Some bubbles are already bursting
Since November, warning signs are showing that the ‘bubble of everything’ is starting to burst in certain assets. With US inflation running at a 40-year high, interest rates are set to rise in 2022-23 to curtail rising consumer prices. This is already having a negative effect on asset prices, especially those of the riskiest of risk assets. And although there is little firm evidence that rising rates actually trigger stock market crashes, investors are clearly more worried now than they were last autumn.
Since peaking at a record intra-day high of 4,818.62 points on 4 January, the S&P 500 closed at 4,397.94 on Friday. That’s a loss of 420.68 points (-8.7%) in 17 days. Another fall of 1.3 percentage points would take the main US market index into correction territory. A further fall of 10 percentage points would take the index into a bear market and thus a fully fledged stock market crash. Meanwhile, the pumped-up Nasdaq index peaked at 16,212.23 points on 22 November 2021. On Friday, it closed at 13,768.92, having lost 2443.31 points (-15.1%) from its high. Another 4.9 percentage-point fall and the tech index would also be in bear territory — unless investors ‘buy the dip’, of course.
Also, the biggest bubbles have burst the hardest. Take, for example, ‘digital gold’ Bitcoin — which its supporters say is a hedge against inflation. Having peaked at nearly $69,000 in early November, Bitcoin currently trades at $35,432, falling to a six-month low on Saturday. That’s a collapse of almost half (-48.7%). Likewise, Tesla stock has crashed from its record high of $1,243.49 on 4 November to close at $943.90 on Friday. That’s a collapse of nearly $300 (-24%) in under three months. Tesla has also crashed by more than a fifth (-21.3%) since 3 January. Ouch.
I’m avoiding speculative assets
Just like Warren Buffett, I’m not as afraid of stock market crashes as once I was. Currently, my family portfolio has no speculative assets in it, only US/global index trackers and ‘boring’ FTSE 100 shares. No over-priced bonds, no volatile cryptocurrencies, no electric-vehicle stocks and nothing overly risky. For now, my value strategy remains exactly the same: to keep on buying cheap, lowly rated UK shares paying high dividends!