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Is a stock market crash coming?

August 15, 2019 by Adam Pearce, CFP®

I will address what might be the elephant in the room.  I believe many of us fear that we are (eventually) going to see another huge market meltdown like 2008.  Maybe we were taken off guard in 2008 and don’t want to make that mistake again.

Because we just lived through a crash in recent history, we feel like it can easily happen again. This is a behavioral bias called “availability or recency bias”.  Additionally, it seems logical to think that because the market since 2009 has gone up so far for so long, we must have further to fall during the next downturn.  There's even a saying, an axiom, “the bigger they are the harder they fall”.

The Federal Reserve recently conducted a study named Do Longer Expansions Lead to More Severe Recessions? It debunks the notion that the bigger they are the harder they fall and that we must be setup for a big crash in the market.  Their conclusion:

     “The strength of the current economic expansion is tied to the severity of the Great Recession (of 2008)” and the “data do not provide much evidence that long expansions are followed by deeper recessions”. However, they also note “although this finding provides some comfort, it is also important to keep in mind that economists have considerable difficulty forecasting recessions, let alone their severity”.

These “mega-meltdown bear markets” (defined as a 40% + drop in the stock market like 2008) only happened  in modern history since 1945.  A once in 25 years event by the numbers.  I do not think this is something we need to fear rather we should have a plan in place and even be opportunistic for when downturns occur.

Contact me today if you need help creating or reviewing your plan.

The views and opinions expressed herein are those of the author(s) noted and may or may not represent the views of Capital Analysts or Lincoln Investment.  The material presented is provided for informational purposes only. Nothing contained herein should be construed as a recommendation to buy or sell any securities. As with all investments, past performance is no guarantee of future results. No person or system can predict the market. All investments are subject to risk, including the risk of principal loss.  The Federal Reserve System (also known as the informally as the Fed) is the central banking system of the United States and controls the Federal Funds Rate (aka Fed Rate), an important benchmark in financial markets used to influence the supply of money in the U.S. economy.