Since financial markets are unpredictable in nature, a sudden stock market cash is an ever-present possibility. At some times more than others though, the threat looms particularly large.
With that in mind, is there a good chance that a stock market crash is lurking right around the corner?
What the experts are saying
Some prominent investors certainly think so. Recently, a handful have spoken out about the possibility of an upcoming market crash. For example, legendary investor Jeremy Grantham says the stock market has a 70% chance of crashing. He even believes it could be on the scale of the 1929 crisis.
Rather worryingly, the Wall Street Crash of 1929 (as well as the Bank Panic of 1907 and Black Monday 1987) occurred in October. Accordingly, investors could be forgiven for being wary of the tenth month of the year.
And then there’s the Big Short investor, Michael Burry. In August it was reported that he made bearish bets against the S&P 500 and Nasdaq 100. According to Security Exchange Commission filings released at the time, Burry was using more than 90% of his portfolio to bet on a market downturn.
Potential triggers of a market crash
A myriad of factors influence fluctuations in financial markets. It could be anything from geopolitical tensions such the outbreak of a war to a global recession triggered by a pandemic.
Each of the many variables holds the potential to trigger a shift in market and investor sentiment. This subsequently causes sell-offs that can swiftly escalate into market crashes.
Looking around, I see plenty of potential triggers that could prompt a sell-off. For instance, the global economy remains overshadowed by recession concerns, China’s real estate market continues to be mired in uncertainty, and the uptick in bond yields is having a notable impact on equity risk premium calculations.
However, even in the midst of these challenges, a stock market crash is by no means a certain outcome. In any case, accuracy predicting short-term movements in the stock market is a near-impossible task.
The Foolish investing philosophy
Instead, by embracing a long-term mentality and adopting an investment horizon that spans decades, I’m preparing myself for the inevitable volatility by focusing on the business fundamentals of the companies in which I invest, rather than on short-term share price changes.
If history has taught investors anything, it’s that financial markets are cyclical, and with each downturn comes the potential for renewal. Over decades-long periods, historically, the value of the stock market rises, making money for patient investors.
In any case, a stock market crash represents the ideal time to buy heavily discounted shares. It’s precisely during these downturns that the market often undervalues fundamentally strong, high-quality companies. This allows savvy investors to secure some shares for a fraction of their true worth.
By bearing that in mind, I’ll be well-positioned to navigate the short-term volatility of the stock market with confidence, regardless of the looming uncertainties.
