Could Stocks Crash in 2021?
The global stock market crash of 1929 and U.S. stock market crashes of 1987, 1990, 2000, 2008, and 2020 wiped trillions off the books and decimated a lot of stock portfolios. But some believe another day of reckoning is coming for the stock market, one that could see stocks crater 80% to 90%. Another stock market crash in the near future is not out of the question.
Why is that possible? Even with the latest September pull-back, the stock market does not reflect the state of the U.S. economy. There have been years of ultra-easy monetary policies that have left us with near-zero interest rates, corporate and personal debt loads are way up, real-estate valuations are lofty, and central banks have become less effective at steering the economy.
It’s a once-in-a-lifetime perfect storm. And when these factors converge, you’re not going to get hit with a 20% or 30% decline—you could see a Depression-era type crash of 80% to 90%.
According to one analyst, the last major global stock market bubble was from 1925 to 1929. It popped on October 28, 1929, or Black Monday, where the Dow Jones Industrial Average tanked 13%. The following day, Black Tuesday, saw stocks fall another 12%. It was the biggest stock market crash in U.S. history and signaled the start of the Great Depression.
How Often Do Global Stock Market Crashes Occur?
It is believed that major global stock market bubbles and crashes occur once every other generation, or once in a lifetime, like a 90-year cycle. And that’s where we are right now.
It may just be a numerical coincidence, but the fact is, there are a number of negative forces that could send stocks reeling in 2021.
As already noted, despite the U.S. and Canada being in the midst of a brutal recession, stock market valuations are sky high. This is due in part to unfettered fiscal stimulus on behalf of central banks like the Federal Reserve and Bank of Canada.
Increasing the money supply and lowering the key lending rate to near zero injects more money into the economy. People and businesses have access to cheap money, which they spend. The end result is a rising, gross domestic product (GDP). Except that isn’t happening.
If anything, corporations and individuals have taken on massive amounts of debt that they are having trouble dealing with. It will be seriously exacerbated when government fiscal stimulus ends.
Won’t Fiscal Stimulus Policies Prevent a Stock Market Crash?
The fact is that central banks have become less effective. For economic stimulus to work, each round of economic stimulus has to be stronger. But with interest rates already at zero, there’s nowhere else to go, except into negative rates. Central banks have run out of tricks to keep the global economy afloat.
Yet, even with trillions of dollars in fiscal stimulus, the global economy is still reeling from the ongoing effects of the coronavirus pandemic. Millions of people are unemployed and bankruptcy filings are in uncharted territory.
During a prolonged recession, consumers are left with less cash, and corporate debt piles up. When earnings take a hit, you’ll see investors pull their money from the stock market, and there could be a huge sell-off. And there’s no amount of fiscal stimulus that could stop that from happening if stocks start to crash in early 2021.
If that happens, investors will be left with devastated portfolios and stocks that rebound a lot more slowly than they used to. That’s bad news for any investor over the age of 30.
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