A stock market crash is looking increasingly likely in 2021 – if not sooner.
There are just too many cracks in the financial system. The warning signs are everywhere. And at some point, the weight of these issues will be too much for Wall Street to ignore.
Even the pro-liquidity policies of the U.S. Federal Reserve and trillions of dollars in Congressional stimulus plans can’t hold off a crash forever.
In the long run, stocks will go up – they always have – but the more you minimize the damage of a stock market crash, the better off you’ll be. You don’t want to see the gains you’ve made since March’s rebound completely vanish.
Today we’ll give you an overview of the many issues driving us toward a stock market crash. And then we’ll show you exactly how to protect your money before the next crash happens.
The Next Stock Market Crash Is Already Brewing
The rebound in stocks we’ve seen since the 35% market drop in February and March has been impressive but not so much supported by the realities of the U.S. economy.
Stocks today are priced for a full-throated rebound that just isn’t materializing.
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While the unemployment rate fell to 7.9% in August, it’s still more than twice the level it was before the COVID-19 pandemic struck. And even with the recent gains, the U.S. has lost 11 million jobs this year – far more than the 8.7 million lost in the 2008 recession.
More than half of the economists polled in a just-released survey by the National Association for Business Economists think 10%-20% of the COVID-related job losses are permanent.
According to Deloitte, the U.S. economy will again slow down in the last three months of 2020. But the worse news is that it sees a slow recovery through next year, with GDP slipping 1.7% in 2021.
And then there’s COVID-19, which is the root of the economy’s woes. While stocks have gone up on reports of progress on vaccines, the arrival of one or more COVID-19 vaccines won’t fix the economy overnight.
For now, the concern is that we’ll see a second wave of COVID-19 infections as we head into the fall and winter (which I warned about in March). That could prompt more closings and further slow business activity. A big enough spike in cases could trigger a stock market crash all by itself.
It may have already begun. According to Reuters, new cases of the virus rose in 27 out of 50 U.S. states in September. Five states had increases of 80% or more.
Unfortunately, the COVID-hobbled economy is just one of several signals a stock market crash is imminent…
5 More Factors That Point to a Bear Market
- Corporate Debt Goes from Bad to Worse: According to Federal Reserve data, U.S. corporate debt rose from $6 trillion at the end of 2010 to $10 trillion at the end of 2019. In the first half of this year, borrowing zoomed another $1 trillion as many companies scrambled to replace earnings lost to pandemic lockdowns. That’s boosted the number of “zombie companies” – companies unable to cover their interest payments – to 18% from 10% last year. A second wave of COVID-19 could trigger a surge of defaults. The markets won’t like that.
- National Debt Goes from Bad to Worse: The heavy stimulus spending this year has added nearly $4 trillion to the national debt. That and the damage to the economy have pushed the debt-to-GDP ratio past 100% – the highest it’s been since World War II. Republican lawmakers unhappy with the swelling of the debt have pushed back on the price tag of the latest economic stimulus proposal. GOP resistance will reduce how much is spent on stimulus going forward. Stocks thrived on the fat government stimulus packages over the summer.
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- The Sleeping Bear Awakens: Wall Street veteran Bob Farrell, who served as the chief investment advisor at Merrill Lynch, had 10 rules for stock market investors. One of those rules described the three stages of a bear market. Farrell said a bear market starts with a sharp drop, which is followed by a “reflexive rebound.” We’ve seen both of those stages in 2020. If the market follows the rule, the third stage will bring a long, drawn-out decline. Both the dot-com crash of 2000 and the stock market crash in 2008 followed this pattern.
- Beware the Blue Chips: Another of Farrell’s rules also has ominous implications for the current market. It says: “Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.” The Big 5 tech stocks – Apple Inc. (NASDAQ: AAPL), Microsoft Corp. (NASDAQ: MSFT), Alphabet Inc. (NASDAQ: GOOGL), Amazon.com Inc. (NASDAQ: AMZN), and Facebook Inc. (NASDAQ: FB) have accounted for nearly all of the stock market’s gains over the past two and a half years.
- A Contested Election: According to the polls, former Vice President Joe Biden is most likely to defeat President Donald Trump in November. But Trump has hinted that he will contest the election if he loses. He frequently says that large-scale voting by mail will result in a “rigged election” and “massive fraud.” The post-election battle in 2000 caused stocks to fall 7.62%. A Trump-Biden legal fight could last longer and serve as the flash point for a more severe, longer-term stock market crash.
How to Prepare for a Stock Market Crash
So when will the stock market crash? We can’t give you an exact day or week – no one can. But with so many signs flashing red, now’s the time to prepare.
A protracted bear market would slam unprepared investors with heavy losses. Many have vivid memories of the 50% losses sustained in the depths of the 2008 financial crisis.
But make these moves and you won’t have to worry:
Short the Market: Several inverse exchange-traded funds (ETFs) tied to the major indexes give investors a way to profit from market downturns. Examples include the ProShares Short Dow 30 (NYSEArca: DOG), the S&P 500 Proshares Short Inverse Fund (NYSEArca: SH) and the ProShares Short Russell 2000 (NYSEArca: RWM). Use with caution; inverse ETFs are designed to be held for very brief periods (1-2 days).
Buy Gold: Gold has a habit of going up in turbulent times. Buying gold (or adding to existing gold holdings) is a veteran way of preparing for a rocky stock market. Probably the easiest way to get exposure to gold is to buy shares of the SPDR Gold Shares ETF (NYSEArca: GLD).
Buy Bitcoin: Some call Bitcoin the “digital gold” because it is slowly evolving into the same type of store of value the yellow metal has been for 5,000 years. Investors can buy Bitcoin directly from exchanges like Coinbase. There’s still no Bitcoin ETF, but the Grayscale Bitcoin Trust (OTC: GBTC) is a publicly traded fund modeled on the GLD ETF.
Buy Put Options: Puts, of course, are options that profit when the price of the underlying asset falls – ideal for a stock market crash. Tom Gentile, Money Morning‘s options trading strategist, has a couple of general tips on using puts as insurance against a market drop. First, he advises investors to buy put options one or two strikes lower than the current stock price. The “out of the money” puts are cheaper. Second, Gentile suggests buying outs 90 to 100 days before expiration to provide a sufficient window of time. Third, he recommends buying puts on market index ETFs like the SPDR S&P 500 ETF (NYSEArca: SPY) rather than individual stocks.
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About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He’s interviewed a number of well-known personalities – ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He’s an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun‘s web site from 2007-2009. Dave’s been writing about Bitcoin since 2011 – long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.