Is a stock market crash coming? Here’s what the data suggests

Over the past 17 months, investors have experienced a historic rally. Since the trough of March 23, 2020, the sea S&P 500 (SNPINDEX: ^ GSPC) has doubled in value. While we have seen healthy rebounds from a bear market trough throughout history, we have never seen the benchmark double from its lows in such a short time.

But such rapid gains in the wake of such economic uncertainty also raise the question: is a stock market crash coming?

While no one knows for sure, we can look to an abundance of data to get a better idea of ​​what could happen to us for the S&P 500 and your portfolio.

Confluence of data suggests crash or abrupt fix increasingly likely

Perhaps the most worrisome indicator that a significant drop could await the stock market can be found by taking a close look at the Shiller price / earnings ratio of the S&P 500. The Shiller P / E takes into account adjusted earnings from the S&P 500. inflation over the past 10 years.

On Monday, August 16, the S&P 500’s Shiller P / E hit an almost two-decade high at 38.91. For added context, Shiller’s 151-year-old average P / E is 16.84.

Naturally, the democratization of financial data with the advent of the Internet has helped to dramatically increase earnings multiples over the past two decades. Nonetheless, the previous four instances where the S&P 500’s P / E Shiller exceeded and held above 30 did not end well. In each of these cases, the index subsequently lost at least 20% of its value.

Examining how the S&P 500 rebounds from bear market lows is also revealing. With the exception of the coronavirus crash, there have been eight bear markets since the start of 1960. Each of these bear markets exhibited at least a 10% (or more) pullback within three years of its trough.

In fact, five of those eight bear markets suffered two double-digit declines within three years of their trough. The point is, rebounding from a bear market bottom rarely translates into a higher straight line, as we’ve mostly experienced over the past 17 months. Historical data suggests that the market is likely to experience a potentially large decline.

A quick glance at historical crash and correction data from the S&P 500 paints a similar picture. Since 1950, the S&P 500 has suffered 38 double-digit percentage declines, according to figures from market analysis firm Yardeni Research. It’s a crash or correction, on average, every 1.87 years. While it’s important to note that the stock market doesn’t stick to averages, it’s still interesting to observe how often the S&P 500 retreats by 10% (or more).

In other words, crashes and large corrections are a very normal part of the investment cycle. Based on the data above, it should come as no surprise to investors if a stock market crash is brewing.

But wait: there is another side to this story

Another facet of this data needs to be explained.

While stock market crashes and corrections are common, historical data also shows very clearly that there are benefits to staying the course as a long-term investor and buying large companies when weak.

For example, the investment landscape does not technically offer any guarantees. Yet every crash or correction in history was ultimately erased by a bullish market rally. This means that long-term investors in the S&P 500 would be 38 to 38 if they bought during a crash or correction, or simply held an S&P 500 trailing index since the early 1950s.

Additionally, Crestmont Research looked at the 20-year rolling returns of the S&P 500 between 1919 and 2020 (a 102-year period) and found that the total returns, including dividends, for any year-end of that period would have paid off. investors a positive return. Only two of those 102 late years (1948 and 1949) produced an average annual total return of 5% or less. Meanwhile, over 40 years ending in that time period yielded at least an average annual total return of 10%.

Essentially, when you buy in the S&P 500 is much less important than how long do you want. If you held your position for at least 20 years between 1919 and 2020, your initial investment has increased.

It also doesn’t hurt that the S&P 500 is made up of 500 of the world’s biggest companies. Its components tend to be profitable, proven companies that are able to take advantage of the disproportionately long period that the US and global economies spend developing relative to the contraction.

Finally, note that while crashes and fixes happen often, they usually don’t last very long. The average double-digit correction since 1950 has lasted 188 calendar days (roughly six months), while the average correction in the modern era (i.e. since computers became mainstream on Wall Street in the midst of the 1980s) is only 155 calendar days (about five months). Comparatively, bull markets are measured in years.

Buying big companies and staying the course is a proven path to building wealth.

Three stocks to buy in the event of a stock market crash

Speaking of big companies, should a market crash occur in the foreseeable future, the following three stocks would be perfect for patient investors to add to their portfolios.

Visa

First, consider recovering payment processor actions Visa (NYSE: V). It is a company that benefits tremendously from the continued expansion of the US and global gross domestic product. Because booms last much longer than recessions, Visa is able to take advantage of increased spending by consumers and businesses.

It is also important to understand that Visa is not a lender. It sticks strictly to its role as the leading provider of payment network services in the United States and around the world. Since it doesn’t lend, Visa won’t have to set aside money if credit card defaults increase during a contraction or recession. This is one of the main reasons Visa’s profit margin is consistently above 50%, and why it rebounds much faster than other financial services stocks.

Intuitive surgery

Second purchase evident in stock market crash is developer of robot-assisted surgical systems Intuitive surgery (NASDAQ: ISRG). Since we don’t have a choice of when we get sick or what disease (s) we develop, there is a constant demand for healthcare stocks with drugs, devices, and operating systems.

What makes Intuitive Surgical so special is its predominance of the assisted surgical space and its growing operating margins. As for the first, none of its competitors even come close to its installed base of 6,335 da Vinci surgical systems. Between the high cost of these systems ($ 500,000 to $ 2.5 million) and the hours of training for surgeons, da Vinci buyers are likely to remain long-term customers.

When it comes to operating margins, Intuitive Surgical is poised to grow over time. This is because the sale of instruments and accessories with each procedure, as well as the maintenance of its robotic systems, generates juicier margins than the sale of the da Vinci surgical system. As its installed base grows, its operating margins will also increase.

Duke Energy

Finally, investors can confidently buy shares of the electric utility Duke Energy (NYSE: DUK) if volatility increases and the broader market falls.

The beauty of utility stocks is the transparency of their cash flow and outlook. That is, the demand for electricity does not change much from year to year, which leads to predictable profits and above-market dividend yields. In the case of Duke Energy, investors pocket a good return of 3.7%.

What really makes Duke Energy an intriguing investment is the $ 58 billion to $ 60 billion the company is spending on new infrastructure projects between 2020 and 2024. The vast majority of that spending will be on renewables, this being the case. which will reduce the company’s electricity production costs and increase its growth rate. As the United States goes green to tackle climate change, Duke’s transition to cleaner forms of energy will benefit its shareholders.