You know that feeling you get when you can ‘smell’ rain coming, like you’re a jungle cat? I have that feeling today about the next stock market crash. And, having been an investor for over 33 years, it’s making me very nervous.
4 reasons to be fearful of another stock market crash
Here are four red flags that make me worried that another stock market crash is coming:
1. Let’s party like it’s 1999 (before the stock market crash)
1999 was one of the most exciting – and terrifying – years for investors. Prices of so-called TMT (tech, media and telecoms) stocks soared to the stratosphere as investors doubled or tripled their money in weeks or months.
In March 2000, the Nasdaq tech index peaked above 5,000, before falling 80% in a three-year stock market crash. That’s what happens to over-hyped stocks, sectors and markets – they bubble up before inevitably bursting.
2. The death of value investing
During the dotcom boom and subsequent stock market crash, shares of old-fashioned, profitable companies fell relentlessly. Hey, why buy shares in market-leading businesses when you can make a fortune speculating in go-go tech stocks?
Today, I constantly hear of ‘the death of value investing’. This takes me back in time – like Bill & Ted – to 1999, 2003, 2007 and so on, when great businesses’ shares were in the bargain bin. Remember when shares in Reckitt Benckiser were below 480p in March 2000? They hit £80 in July. How’s that for the death of value investing, huh?
3. Concentrating too hard
When the global economy is strong, this rising tide tends to lift all markets and share prices. But when the relentless rise of an index is driven by only a few ‘super stocks’, I get jittery.
Right now, five huge tech stocks account for almost a quarter of the entire value of the S&P 500. What’s more, all of the S&P 500’s gain this year have been generated by these tech giants. Again, this market concentration makes me worry about the next stock market crash.
4. The return of the ‘bezzle’
When economies, companies and job markets are healthy, personal and corporate fraud and cheating declines. In tougher times, embezzlement more easily comes to light. Economist John Kenneth Galbraith called this undiscovered fraud ‘the bezzle’.
This year saw the collapse of former German tech ‘wunderkind’ Wirecard, exposed as a giant global fraud by excellent Financial Times investigative journalism. Now attention has turned to accusations of widespread cheating at Nikola, a transport-tech firm that only listed on the Nasdaq in June. Since these accusations emerged, Nikola stock has almost halved. Ouch.
What I’d do to avoid losing money: buy ‘SLR’ shares
As a believer in the long-term wealth-building power of investing, I don’t urge investors to sell up and move into cash to avoid the next stock market crash. Market timing is just far too difficult to get right. Instead, I would adopt an ‘SLR approach’ by buying stocks that offer Safety, Liquidity and Returns – in that order.
For example, I’m a big fan of UK pharmaceuticals giant GlaxoSmithKline (LSE: GSK). Indeed, I recently made a case for buying GSK shares whenever they slip below £16. Below this price, GSK’s 80p yearly cash dividend translates into a dividend yield above 5% a year.
On Monday afternoon, GSK shares closed at 1,487.6p, making their current yearly dividend yield 5.38%. That’s a decent cash return to bank while shielding your money from the worst of the next stock market crash!
Cliffdarcy owns shares of GlaxoSmithKline. The Motley Fool UK has recommended GlaxoSmithKline. 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.