Are We Due For Another Market Crash?

2020 has been a crazy year, one for the record books. Notably, the Major stock market indexes are on track to finish the year with a gain (as of this writing). Given the pandemic, immediate recession, and change in the oval office: Who could have predicted it?

Skeptics of this recovery remain: we have read and heard from plenty of investors who staunchly believe a stock market crash is right around the corner. They cite the normal list of concerns: higher taxes, more regulation, national deficit, auto/student loan defaults, etc. These are all known variables and all do present risks.

The natural cynicism is understood, as pessimism is inherently seductive. Risk avoidance is in our DNA. Deirdre McCloskey once wrote: “For reasons I have never understood, people like to hear that the world is going to hell”

Don’t tell that to stocks, though. The equity market has a way of looking into the future, and pricing in variables today. Stock prices reflect millions of data points, investor expectations, and emotions.

Was it a coincidence that the stock market bottomed in March the very same day the Federal Reserve loaded a cannon with $10 Trillion and fired it into the economy? Look at 2020: As people worked from home, cloud computing stocks rose. As Biden’s lead in the polls grew, so did clean energy stock prices. As a vaccine progress was made, travel stocks took flight.

The stock market is like a baserunner of economics. I’ll explain:

Surprise events are often said to be “out of left field”. The origin of the term refers to a play in baseball where a runner is trying to score. Heading towards home plate, the left fielder is behind the 3rd base runner and is the only outfielder he can’t see. The other outfielders are in view so the runner can more easily calculate the chances of scoring or being thrown out.

What the stock market really hates, is what it cannot see.

The Pandemic was a left-field event. So were Brexit, the Flash Crash, 9/11, and so on.

Small market pullbacks are normal. In any given year, we usually get two 10% drops (on average). Stocks have growing pains like everything else.

The crashes, however, are virtually always due to left field events, which cannot, by definition, be market timed.

Our advice? Keep a rainy day fund for surprises, save like a pessimist, and invest like an optimist. After all, not a single market crash has been permanent, yet.