In the last 17 months investors experienced a historic rally. Since its bottoming out on 23 March 2020, the Value of broad-based S&P 500 doubled. While investors have experienced some healthy recovery rallies from a bear market bottom throughout history, it has never happened that the Reference index has doubled from its lows in such a short time.
But with such rapid price gains, despite global economic uncertainties, the question also arises: Comes a correction or even a stock market crash?
Although no one knows for sure, investors can rely on a Access a wealth of datato get a better idea of what’s coming to the S&P 500.
The data suggest that a correction is imminent
A confluence of data suggests that a crash or a steep correction becomes more likely. The maybe most worrying indicator that the stock market could expect a significant decline can be explained by a close study of the Shiller price / Earnings ratio of the S&P 500. The Shiller-KGV takes into account the inflation-adjusted gains of the last 10 years.
On Monday, on August 16, the S&P 500’s Shiller P / E hit a nearly two-decade high of 38.91. For an additional context, the average Shiller P / E for 151 years 16.84.
Understandably, with the advent of the Internet over the past two decades, the democratization of finance has contributed to the Significantly increase profit multipliers. Nevertheless, the last four cases in which the S&P 500’s Shiller P / E has exceeded 30 have not ended well. In each of these cases subsequently, the index lost at least 20% of its value.
Also revealing is the examination of how the S&P 500 is recovering from bear market lows. Apart from the coronavirus crash, there were eight bear markets since the beginning of 1960. Each of these bear markets experienced a decline of 10 % (or more) at any one time within three years of reaching its low point.
Actually suffered five of these eight bear markets within three years of hitting a bottom, two double-digit percentage declines. The point is that a rebound from a bear market bottom rarely leads to a straight line up, as investors have overwhelmingly experienced over the past 17 months. Historical data suggest that the market has a potentially significant downward movement is imminent.
A quick look at historical crash and correction data for the S&P 500 paints a similar picture. Since 1950, the S&P 500 has according to the market analysis company Yardeni Research 38 double-digit percentage losses. This is on average every 1.87 years a crash or a correction. While it is important to note that the stock market does not hold to averages, it is worth observing the frequency with which the S&P 500 declines by 10 % (or more).
In other words, Crashes and steep corrections are a normal part of the investment cycle. Based on the above data, it should not surprise investors if a stock market crash is imminent.
However, another side of this data also needs to be told.
Although stock market crashes and corrections are common, historical data also show very clearly that there are Benefits of staying on track as a long-term investor and in times of weakness to buy strong companies.
Every single crash or correction in history was eventually wiped out by a bull market rally. In essence, it is therefore much less important when investors buy into the S&P 500 than how long they last. If one held a position for at least 20 years between 1919 and 2020, the initial investment grew in 100% of cases.
It also does not hurt that the S & amp; P 500 from 500 of the largest companies in the world. Its components, as a rule, are profitable and proven companies for years. Also, investors should note that crashes and fixes are common, but usually do not last very long. The average double-digit correction since 1950 lasted 188 calendar days (about 5 months). In comparison, bull markets are measured in years.
In sum: Buying strong companies and “maintaining the course” is a proven way to build wealth.
Speaking of great companies: should a stock market crash occur in the foreseeable future, the following three stocks perfect for patient investors to add to their portfolio.
Visa is a company that benefited immensely from the steady expansion of US and global gross domestic product. Since periods of expansion take considerably longer than recessions, Visa can be increased spending to benefit consumers and businesses.
It is also important to understand that Visa is not a lender. It strictly adheres to its role as leading provider of payment network services in the U.S. and worldwide. Since Visa does not issue loans, Visa no cash put asidewhen credit card defaults increase during a contraction or recession. This is an important reason why the Profit margin of Visa is consistently above 50% and why it is recovering much faster than other financial services stocks.
A second interesting purchase during a stock market crash could be the robotic surgical system developer Intuitive Surgical be. There is a steady demand for healthcare stocksoffering medicines, devices and operating systems.
What makes Intuitive Surgical so special is its Dominance in the field of assisted surgery and its growing operating margins. With the former, none of its competitors comes even close to the installed base of 6,335 da Vinci surgical systems approach. Between the high cost of these systems ($500,000 to $ 2.5 million) and training hours for surgeons, da Vinci’s buyers are likely to remain long-term customers.
When it comes to operating margins intuitive Surgicals are prepared to expand over time. This is because the sale of instruments and accessories, as well as the maintenance of the robotic systems, generates better profit margins than the actual sale of the da Vinci surgical system. As the installed base grows, so do operating margins.
Investors can also confidently buy shares of the power company Duke Energy. The beauty of Utility stocks is the transparency of cash flow. This means that the Electricity demand hardly changed from year to yearwhat to predictable profits and market-leading dividend yields. In the case of Duke Energy, investors collect a expect a healthy return of 3.7 %.
What really makes Duke Energy a fascinating investment are the $ 58 billion to $ 60 billion that the company will spend on new infrastructure projects between 2020 and 2024. The vast majority of this expenditure is spent in renewable energy which will reduce the company’s electricity generation costs. As the US becomes increasingly active in the fight against climate change, the Transition from Duke Energy to cleaner forms of energy benefit its shareholders.
Last updated on August 22, 2021
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