With global growth slowing, there’s been a lot of talk about a stock market crash. In an article yesterday, I looked at three reasons why we could potentially see a crash in 2020. But today, let’s look at the other side of the picture. Here are three reasons we may not see a stock market crash next year.
Firstly, stop for a minute and think about what’s driving this bull market? It’s the technology sector and, in particular, large-cap tech stocks. Just look at the share prices of Apple, Microsoft, and Google over the last year – Apple’s up 22%, Microsoft’s 29% higher, and Google’s gained 18%.
The reason the tech sector is flying? Well, right now, we’re in the midst of an incredible technological revolution. Some people even call it the ‘Fourth Industrial Revolution’. Today, companies like the three above, as well as others such as Amazon, Uber, and Netflix (notice that these companies are all listed in the US which is why I often say that UK investors need to have plenty of international equity exposure) are completely changing the way we go about our daily lives.
Now the thing about industrial revolutions is that they’re not ‘mean-reverting’. For example, after the invention of the steam engine in the late 18th century, no one ever went back to the horse and cart for long-distance travel.
This leads me to believe that the technology sector could have plenty of gas left in the tank. With technology likely to continue advancing at a rapid rate in the years ahead (think driverless cars, delivery drones, surgical robots, etc.) this bull market may have much further to run.
We’re likely to see market corrections along the way, of course, but as for a Global Financial Crisis-style crash, it may be years, or even decades away.
I also don’t think we’re in a technology bubble right now. Sure, the valuations of many tech companies at the top of the S&P 500 are high, but most are not outrageous. For example, Apple currently trades on a forward P/E of around 19.5 while Google and Facebook are on 24.4 and 22.2, respectively. Expensive, yes. But hardly bubble territory is it?
Finally, it’s worth considering investor sentiment. To quote famous investor John Templeton, bull markets usually “die on euphoria.” In other words, they often end when stocks are surging higher because investors are in ‘greed’ mode and no one is thinking about risk (like Bitcoin in late 2017). When people who wouldn’t normally be interested in stocks (i.e. your taxi driver or your hairdresser) are handing out stock tips, you know you need to be careful.
Right now, I’m just not seeing that kind of sentiment at all. If anything, many investors are very much on edge and avoiding equities. For example in October, bond ETFs attracted more inflows than equity ETFs.
Ultimately, investor sentiment at the moment is nothing like it was in 2007, or the late 90s, right before the last two major stock market crashes. For this reason, a major stock market crash may still be some way off.
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Edward Sheldon owns shares in Apple, Alphabet, and Microsoft. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. The Motley Fool UK owns shares of and has recommended Alphabet (C shares), Amazon, Apple, Facebook, and Netflix. The Motley Fool UK has recommended Uber Technologies and recommends the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. 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.