There are a lot of things we don’t know about stock market crashes.
Though investors might prefer to cover their eyes and ears when the words “stock market crash” are uttered, the perceived likelihood of a crash occurring relatively soon is growing.
As of the close on June 7, 2021, the Shiller price-to-earnings ratio, is based on inflation-adjusted earnings from the previous 10 years.
Even more worrisome is what’s happened in the previous four instances where the S&P 500 Shiller P/E topped and sustained a reading of 30 — namely, losses ranging between 20% and 89%.
Looking back 61 years, there have been nine bear markets.
According the market analytics company Yardeni Research, there have been 38 separate instances since the beginning of 1950 in which the S&P 500 has retraced by at least 10%.
Even though the stock market doesn’t strictly adhere to averages, it gives us a blueprint of roughly when to expect hiccups in the major indexes.
While the Fed has signaled its willingness to allow inflation to temporarily rise above its 2% long-term target, rapidly rising inflation could cause the nation’s central bank to act quicker than Wall Street and investors had expected.
Consider it a way to leverage their gains, as well as their losses, if they’re incorrect about which way a stock will move.
But here’s the kicker: A huge spike in margin debt has been observed before both extended bear markets this century.
Again, we won’t know how long a slump will last or where the bottom will be, but we do know that each of the major indexes are likely to eventually erase all of their declines over time.
In short, if you bought an S&P 500 tracking index at any point, you made money as long as you held on for at least 20 years.