Next Stock Market Crash. Learn From History to Prepare For The Future.

Are you worried about the next stock market crash? If you are looking this up you probably should be putting some thought into it but it’s hard to sort out when it’s coming and how bad it will be. Dive in for some answers about what to expect!

But first. The world is nuts.

Have you ever watched the financial news and seen two experts with 2 different opinions duking it out? I remember watching Business News Network TV in 2008 and the head of some huge hedge fund was arguing with the head of a large mutual fund company. Both of them with billions under management, both with very different opinions about:

  • when the market was going to bottom
  • what the cause of the bottom would be
  • What metric would assess the distance to the bottom

In other words, they disagreed on everything. Market timing and stock market crashes are not exactly textbook.

These were TV experts. Top of the line. And they had no idea. 

Are we screwed? Only if you think people have a clue. I do think it’s possible to make some good money moves as long as you follow one simple rule: markets are tricky and the “experts” have no clue. 

That’s what we’ll go over today. 

What causes stock market crashes?

Like all others before it, there will be two parts to the next stock market crash: 

  1. Over-inflated markets or bubbles develop and create an unsustainable valuation across the stock market. This can be fine for a long time but eventually we end up with…
  2. Market demand falling away as people on a large scale want to ditch risk for some reason (war, politics, war, some other economic event like a Sovereign default like in Greece).

You can’t have a crash without both sides of that coin. So for some proof and education let’s look back in time to show that I’m not crazy and so that we can learn from our mistakes.

Famous Stock Market Crashes

A look at past stock market crashes with lengths of recovery (Image source)

The Great Depression

The most famous of all stock market crashes came along in 1929 after the roaring 20s. 

Causes of the bubble:

  1. Excitement The roaring 20s were a time after world war 1 and beating the Spanish Flu. Everyone was excited and justifiably so.
  2. Post war, companies had more production capacity than people could keep up with, so everything was available to buy on credit. Making a credit bubble.
  3. Anti-Labour movements lowered wages and drove up share prices.

Causes of Crash:

  1. Wild inequality – the top 1% took home 23.9% of the earnings
  2. Gold standard – The US used the gold standard and couldn’t do much to halt a market freefall. 
  3. Bankruptcies – The credit boom led to bankruptcies especially in farm circles where there was more war era overproduction than anyone knew what to do with.

Total market loss: 89%

The Great Recession

The most famous modern stock market crash happened in Dec 2007 through June 2009 after a great market run from 2000-2007. 

Causes of the bubble:

  1. Secret subprime mortgage market which was only profitable because the market wasn’t crashing.
  2. Credit bubble spurred by very low interest rates.
  3. De-regulation in the financial industry spurred unsustainable growth

Causes of Crash:

  1. Homes stopped appreciating. Home builders caught up with demand by 2005 and drove the market into oversupply causing home depreciation and a market collapse. 
  2. Bankruptcies – Loose credit, and little oversight created another credit boom leading to bankruptcies.

Total market loss: 56%

Dot Com Bubble

A tech-induced bubble seems very reminiscent of what’s going on now with the massive FANG run lately.  The stock market crash came about on March 10th, 2000, with a run up from 1995 to 2000. 

Causes of the bubble:

  1. New technology that many people didn’t really seem to understand
  2. Rampant speculation in tech companies with the growth of the internet that seemed to have no end.
  3. Credit bubble spurred by very low interest rates.

Causes of Crash:

  1. A few companies started to declare bankruptcy (most had no business plans when they received funding anyways) and lending dried up.

Total market loss: 49%

But what about right now?

State of world right now

The Everything Bubble

Someday this recession will be in a history book and I think these will be the causes: 

Causes of the bubble:

  1. Wealth Inequality – Covid only made it worse but people with money are making lots of it. Wealthy people have too much money and invest it all to get more wealthy but the economy falls out underneath them since the non-rich have no money.
  2. Credit bubble spurred by very low interest rates. (This is a recurring theme)
  3. New financial industries (like NFTs and Crypto) are unregulated (also a recurring theme) and are being wildly speculated on.

Causes of Crash:

  1. Bankruptcies that inevitably come from Income inequality, like in the great depression.
  2. Great Resignation – A lot of people are quitting post-covid which causes inflation. The economy can only take so much of that before it pops. 
  3. Inflation – Takes away the spending money that caused all that growth. 
  4. Demographics – Namely, more and more people retiring has the same effect as the great resignation. 

Total loss: Easily over 50%. Most stock market crashes are over 50% when the government isn’t already in a deficit. Now there are few ways to pull back from a steep decline like in 2008.

Where is the Stock Market Heading? 

By now you get it, bubbles occur regularly and are followed by the next stock market crash. It is a basic feature of financial markets and it will happen again, and again, and again. 

What this means though is that a lot of people are obsessing about the topic and trying to understand if we are in a bubble, when it will pop, how to make money, etc… Truly, they are wasting their time and are likely to lose money playing that game. For every “Big Short” Michael Burry, there are 1000 guys that lost their shirts. 

Still, for all you finance nerds, let’s see where we are now. 

Last year, it felt at times the world was ending. But for financial markets, the pandemic was just a short panic quickly shrugged off. Can you see it on this 20+ year graph of the S&P 500?

A look at the S&P 500 over the past 20 years. The stock market hasn’t exactly slowed down (Image source)

You see the little dent to the right, yeah, that the Covid stock panic in spring 2020. This is a very good demonstration of why you should stay invested in the market, instead of trying to time it. 

Imagine if you sold during that gap, and missed the almost doubling of the S&P500 since?That’s the opposite of how to make money! A short term panic can screw up your financial future. 

Just don’t do it. Trust me.

But in the long run, the stock market performances reflect pretty well how well or bad the world is going. If the real economy is having trouble, it will catch up with stocks sooner or later. The same is true if all the lights are flashing green. 

In the long run! Is the doubling we’ve seen permanent or temporary?

The very long term stock market outlook (10 years +)

One key thing to understand the future is to know that the world is aging … fast. Both the Western countries and China have few children and their populations are aging rapidly. 

The UN stats show us an explosion in the elderly population of the world. On a grand level it’s great for humanity, more people are richer and live longer. Yay!

Economically, it’s a little less good. This is likely to reduce future growth, as less young people = less workers = less GDP = Inflation = Bad things. 

The world’s senior population is drastically increasing. Great for people, but could it lead to the next stock market crash? (Image source)

Generalized aging also means that the world population will grow less and less. This too should reduce future growth. Less people = less GDP = Inflation = Bad things. 

While the population may be growing, the growth has drastically slowed down. How will this impact long-term economic growth? (Image source)

So in the long run, yes I think inflation in the >10year future will be a big deal and cause markets to drop like in the 70s. People are talking about inflation now, but that’s a blip on my inflation radar, inflation over multiple decades in my books will be trouble.

Short term stock market outlook (<5 years)

So in the long term, we should expect less economic growth due to changes in demographics. But what about the short term?

If you read my article about how news is bad for you, you know I am not the type to go panicking about the so-called “urgent” news. I think it is just distracting you from the bigger picture. 

There are some big events happening for sure. But the quantity of big events is bonkers. 

For the obviously negative events: 

Next year global economic growth is expected to slow down. And the forecast by the IMF has been revised lower just this month. 

People like to debate if it is because of China, inflation, oil prices, or whatnot… It is pretty irrelevant and no one can agree anyway. What matters is that there is some planned turbulence on the way. 

Economic outlook (Image source)

Are we overvalued today?

Oh yeah! We are overvalued. “Late cycle” as investment bankers would say. So is it time to panic? Is economic collapse and Mad Max around the corner? 

I don’t think so. And frankly, if it was, your portfolio would not be your main problem. No one looks at stock prices while roaming the wasteland, do they?

Even so, it is true that the current market valuation makes the Internet Bubble in 1999 and the Housing Bubble of 2008 look like puny little hills compared to the steep cliff that stocks have been climbing recently. 

This is also true while looking at the price to earnings or P/E ratio of the S&P 500 for the last century and a half. The price of stocks compared to the earnings is quite high at the moment. This indicates stocks are kinda expensive from a long term perspective. 

Price to earnings ratio in S&P 500 over the past 150 years! The ratio is high, meaning that stocks may be overvalued. (Image source)

Not the most expensive they have EVER been, but up there with the 2 other major collapses in the last 2 decades. 

So. Are valuations high? Yes. Are strong headwinds expected? Also yes. That’s a bad combination which could easily end in people jumping ship on the market (aka loss of demand which is the catalyst for a crash). But can the markets go higher?

Could it go higher?

Markets can always go higher. People are nuts and the world’s banks have been very supportive of keeping this train rolling, so it’s possible this could keep going for years. 

I don’t think there is a great economic reason for it to, but it could. I’m certainly not going to stop riding the train. 

In the last few years before a bubble pops there are massive upsides as new investors start frothing at the mouth. 2006 and 2007 were great years in the market. As we now know, it was all based on lies, but great returns nonetheless. 

Now is no different.

Besides market valuations being high, people are getting crazy these days. Manic speculation in:

  • Crypto
  • reddit bets
  • NFTs (seriously, how does anyone consider that investing?)
  • Meta real estate
  • Massive leverage

And most telling of all stock pickers are advertising their picks and how to make money on TikTok. If that’s not a sign of a market apocalypse I don’t know what is.

But it’s normal near the end to get crazy. Everyone gets excited, but I want to cash in on their excitement too.

So what do you do? Enact a plan is what you do!

How to prepare for the stock market crash

I really don’t believe anyone can time the market perfectly. Thinking you can, and acting on it is financial suicide. But it is possible to shift gears a little bit when things get hot and be ready for the eventual downturn.

TL;DR – Next Stock Market Crash

I don’t know exactly when a stock market crash will happen. No one does. We had one of the longest economic expansions in history since 2009, ever. It can last a lot longer. Or maybe not. But if you follow the plan, when (not if) a recession hits, you will already be ready to be “opportunistic”. 

  • Recessions are normal
  • A recession will happen one day. 100% guaranteed. 
  • Things seem high right now because the government is helping out a lot
  • Things seem high on a long term horizon too.
  • So get ready

FAQ – Next Stock Market Crash

How bad will the next stock market crash be?

The next stock market crash is shaping up to be big. Governments are still using all the anti-recession tools that they have, like quantitative easing, low rates, and free money for the unemployed. So next time the market collapses there aren’t many ways to hit the brakes. 

Stock market crashes since the year 2000 have also been quite large when there were measures to take (-49% for the year 2000 telecom bust, and -58% for the year 2008 subprime mortgage crisis) so most likely the next stock market crash will represent over a 50% decline.

Is the market going to crash in 2022:

No one can say for sure that the market will crash in 2022. However, it can be said due to many factors the market is ready to crash in 2022. Factors such as geopolitical tensions, rising inflation, changing demographics, end to government stimuli. 

If the market crashes in 2022 it will be a big one as modern crashes have dropped valuations to about half and during those crashes, governments had more levers to limit the crash than they do now


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