The next stock market crash arrived in 2022/23. My stock market crash prediction in July 2021 proved to be correct.
This article discusses how I predicted the crash using macroeconomic data, research, and logic. You can use this study to understand better how stock markets work and make your predictions.
I also provide a historic stock market crash analysis, covering how long the stock market takes to recover, the reasons for previous crashes, and what has been done to avoid future declines.
Stock Market Crash Analysis & Predictions
It is normal to worry about the next stock market crash. You probably have a portion of your life savings in your retirement fund, which is tied to the stock market’s success.
I will show you the impact of every major stock market crash over the last 100 years and provide you with a prediction of when the next one will occur.
The big question is, should you fear a crash, and what can you do to avoid it? This analysis will help you decide.
Is The Stock Market Crashing?
Yes, the stock market is crashing, with the S&P 500 down 32% in 2022. A simple way to assess if the stock market is crashing is to use technical analysis of the stock market indices. Using a long-term chart of a broad market index like the S&P 500 and overlaying a simple moving average 9 indicator over the price line can be a simple indication.
Make sure the chart is set to 1 week per bar. The market is in a significant correction when the price drops significantly below the nine-week moving average. See the chart below.
Yes, I can confirm that the stock market will crash; in October 2022, we experienced the start of a crash, which is still ongoing. Crashes and corrections are unfortunate side effects of global capital, equity, and commodity markets. Maintaining a perfectly regulated, fair, smooth-running economic system seems beyond normal human and governmental control. History tells us that over the last 90 years, we have had six major stock market crashes, an average of one every 15 years.
Next Stock Market Crash Prediction
No one can truly predict exactly when the next stock market crash will occur. But using our 100 years of research, we can spot the conditions that make a stock market crash more likely. The primary causes of stock market crashes are a lack of institutional regulation and risk management and the low cost of money, which causes bubbles to occur. In 2023, we must endure five major risks that will cause a future stock market crash.
5 Systemic Risks That Will Cause the Next Stock Market Crash
Low interest rates
Government cash stimulus
Property & equity bubbles
Inflation
The pandemic
Twelve years of low interest rates mean that the yields on government bonds are close to zero. This means that the extra capital available through government stimulus needs to be invested somewhere: equities and property. The Nasdaq 100 is up 122% since the bottom of the crash in March 2020 and up 53% from the previous all-time high in February 2020. That can be seen as an incredible recovery or the signs of an equity bubble. Median House Price Sales in the US (MPUS) have increased by 60% in the last ten years. In addition to this, the pandemic is over, and it has caused a serious decline in output, boosting inflation. Inflation causes stock market declines, and increasing interest rates battles inflation but causes crashes.
Considering that all these risk factors are real and present, it is not hard to imagine that the next stock market crash is coming soon.
My Previous 2021 Prediction for the Next Stock Market Crash
Based on the established stock market and business cycle theory, the next correction in the stock market will occur in 2022/23. This correction could be a crash considering the five systemic risks of stimulus, inflation, rising interest rates, equity bubbles, and low unemployment, causing increasing consumer demand.
☆ My Current 2024 Prediction for the Next Stock Market Crash ☆
Based on the market and business cycle theory, the next stock market correction will occur in 2027 (Kitchin Cycle) and 2031 (Juglar Cycle). The future crash will have two or more of the six systemic risks of inflation, rising interest rates, asset bubbles, financial mismanagement, political turmoil, or high unemployment.
Video: The 3-5 Year Business Cycles Predicted A Market Correction in 2022
You can predict a stock market crash by assessing if any 4 of these events are happening. 1. Asset bubbles. 2. Increasing interest rates 3. Poor institutional risk management. 4. Economic shocks. 5. High inflation. 6. Global Pandemics.
What is a Stock Market Crash?
A stock market crash is a correction or realignment of stock value. A correction means that the stocks that form the basis of a stock index are deemed to be overvalued, and a sell-off begins. Stock market crashes can be extremely volatile and fall quickly due to psychological fear.
Why Do Stock Markets Crash?
A stock market crashes because investors lose confidence in the value of the equities they own. If you believe that the future earnings potential of stocks you own will be diminished, you will seek to sell the stock before its price decreases; when many investors start selling simultaneously, this causes a crash.
Why Do Stock Markets Go Up?
If you observe any long-term chart of any major stock index, you will see that it increases in value. There has never been a 20-year period when the stock market has not increased in value.
Stock markets increase because companies that issue stock continually seek to improve their business, create better products and services, become more efficient, and generate more revenue and profits. These activities add value to a company, and this continuous value increase grows the value of the stock and, therefore, the value of the stock market.
When Did The Stock Market Crash?
There have been six major stock market crashes since 1929. In 1929, the DJIA lost 89% in 3 years; in 1973, the market lost 46% in 2 years; and in 1987, stocks dropped 35% in 4 weeks. More recently, in 2000, the Nasdaq crashed by 83%, and in 2008, the DJIA lost 54% in 16 months. Finally, in 2020, due to the COVID pandemic, the markets dropped by 38% in 5 weeks.
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How Long Until Stock Markets Recover From A Crash?
Our analysis of six major US stock market crashes in the last 100 years shows that it takes 9.8 years to recover. The average peak loss of these crashes was 57%. This can be somewhat misleading, though. The 1929 crash was exceptional in its size and duration. Additionally, governments and central banks have realized that they can manage inflation and stimulate the economy to speed up economic and stock market crash recovery.
Over the last 20 years, we have had three major crashes, with an average loss of 62% but an average recovery time of 7 years.
A breakdown in investor confidence caused the 1929 stock market crash. The Dow had risen by over 503% in the previous nine years, led by the general public’s unrestricted access to credit, which they used to buy stocks on margin. High unemployment and an unregulated, unsustainably high stock market led to a collapse in confidence, which caused the stock market crash.
The 1929 Stock Market Crash in Numbers
The 1929 stock market crash and subsequent depression was the longest historical recession, lasting 23 years. The Dow Jones Industrial Average lost 89% of its value in 3 years, causing widespread poverty, debt, and homelessness.
Stock Market Crashes Chart: The 1929 Stock Market Crash Lost 89% in 3 Years & Took 23 Years to Recover.
The increased production output due to World War II gave economists valuable lessons in stimulating economies from recessions.
What Caused the Stock Market Crash of 1929?
Ultimately, the cause of the 1929 stock market crash was an asset and equity bubble driven by the general public’s unrestricted access to credit. Easy access to credit fueled a wave of highly speculative and risky investments in the stock market. Eventually, prices were unsustainably high, and the overheated stock market crashed.
What Has Been Done To Avoid The 1929 Crash in the Future?
The introduction of market regulators and legislation to ensure accounting transparency and the limitation of credit risk were the major steps taken to avoid another great depression.
1973 (Oil Shock)
In October 1973, OPEC (Organization of Arab Petroleum Exporting Countries) declared an oil embargo on countries supporting Israel during the Arab-Israel Yom Kippur War. This was an attempt to exert political influence on Western nations, who were highly dependent on Middle Eastern oil. This led to a global economic shock wave.
The 1973 Stock Market Crash In Numbers
The 1973 Oil Crisis caused a crash that wiped out 46% of the Dow Jones Industrial Average in 2 years, and it took 10 years for the index to recover from the loss.
Stock Market Crashes Chart: The 1973 Stock Market Oil Crisis Crash Caused a 46& Loss in 2 Years, Which Took 10 Years to Recover.
What Caused the Stock Market Crash of 1973?
The cause of the 1972 stock market crash was geopolitics and market disruption. The Oil embargo severely disrupted Western economic output and caused a massive correction in the valuation of companies dependent on oil, which was essentially most of the economy.
What Has Been Done To Avoid The 1973 Crash in the Future?
Western governments invested heavily in decreasing dependence on imported oil; for example, Henry Kissinger unveiled the “Project Independence” program, which diminished reliance on OPEC by 1981.
1987 (Black Monday)
The 1987 Stock Market Crash In Numbers
The 1987 Black Monday Crash was extremely aggressive, dropping 35% in 4 weeks, but it recovered relatively quickly in 2 years.
Chart: 1987 Stock Market Crash (Black Monday) Dropped 35% in 4 weeks and recovered in 2 years.
What Caused the Stock Market Crash of 1987?
There is no definitive answer as to what caused the 1987 crash. Most experts agree that investors saw the market as overvalued, trading at a PE Ratio of 23. After a strong bull market in the 1980s, there was already considerable fear. Understanding market sentiment, fear and greed, and psychology is important when investing in the stock market. When confidence is lost, it can produce a cascading effect of extreme panic selling.
What Has Been Done To Avoid The 1987 Crash in the Future?
The lessons learned from the 1987 crash led to the introduction of trading curbs. These are essentially circuit breakers that halt trading when markets experience exceptional volatility and losses. They have been used many times in future crashes and help mitigate extensive losses by introducing a cooling-off period to dissipate the fear emotions in the market.
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The internet bubble caused a major crash for the NASDAQ, with an 83% loss over three years. It took the NASDAQ over 16 years to recover from the crash.
In comparison, the Dow Jones Industrial Average only dropped 37% over 34 months and took 6.6 years to recover. This was very much an “Internet Stocks” crisis, but it still impacted the broader market.
From 1993 to 2000, modern web browsers and the World Wide Web enabled new ways of doing business, primarily bypassing traditional retail business models and cutting costs. This disrupted the established business models of “Bricks and Mortar” businesses. The aggressive push of new internet businesses to claim market share resulted in companies running at huge losses to dominate the web.
Investors rushed to buy stocks of internet-related companies, regardless of the company valuation. With a huge wave of investment, stock prices soared to unsustainable levels. The NASDAQ 100 rose 400% and reached a Price-Earnings Multiple of 200, which has never been seen before. With investment banks such as Citigroup and Merrill Lynch pumping the market and analysts proclaiming, “Bricks & Mortar companies are dead,” the bubble was complete.
“The collapse of the Internet bubble, perhaps one of the largest financial fiascoes in US history, came after three years, starting in January 1997, when investors would buy almost anything even vaguely associated with the Internet, regardless of valuation. Investors ignored huge current losses and were willing to pay 100 times the expected earnings in fiscal 2002. They were goaded by bullish reports from sell-side securities analysts and market forecasts from IT research firms, such as IDC, Gartner, and Forrester Research.”Source CNN Money November 2001
In 2000, it became clear that many internet companies were burning cash fast, and bankruptcies began. This coincided with the Federal Reserve hawkishly increasing interest rates to help to cool an overheating economy. With interest rate hikes and high bankruptcies, confidence collapsed, and so did the NASDAQ 100, which lost 83% in 2 years and took 10 years to recover.
Interestingly, the brick-and-mortar companies listed on the NYSE also suffered from the crash, with the DJ-30 losing 34% in 34 months and taking 6.5 years to recover.
What Has Been Done To Avoid The 2000 Crash in the Future?
Laws and regulations regarding the full disclosure of risk and tightened rules on conflict of interest declaration have impacted the market. There was also a string of litigation against executives of companies involved in high-profile scandals, including Enron, Worldcom, and Andersen Consulting.
2008 (Global Financial Crisis)
The 2008 Financial Crisis Crash In Numbers
The financial crisis was an aggressive crash lasting just 16 months, but it wiped out 54% of stock value. Due to the decisive central bank and government action, the recovery took five years and was not prolonged more than necessary.
Due to the weakening of the Securities and Exchange Commission (SEC) and lax financial regulation, banks took excessive risks in mortgage lending practices. The introduction of predatory lending practices, such as sub-prime mortgages, allowed people to buy houses with low initial repayments, but large delayed repayments led to a huge property bubble.
These high-risk loans were hidden in Collateralized Debt Obligations (CDOs) by Citigroup and Merrill Lynch and sold on as investments to banks and funds globally. When the mortgages began to default, there was a string of bankruptcies in the financial sector, including the collapse of Lehman Brothers, which kicked off the worldwide panic and breakdown in confidence.
For a great movie that covers the Financial Crisis, watch Inside Job
What Has Been Done To Avoid The 2008 Crash in the Future?
The main response to avoid repeating the 2008 Financial Crisis was introducing the Dodd-Frank Act in 2010. It created large-scale reform and regulatory improvements, including introducing the Financial Stability Oversight Council (FSOC) and better derivatives and shadow banking regulation.
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The Corona Crash was the most aggressive and shocking, with a loss of 38% in just five weeks. Luckily, the market recovered in record time due to government stimulus and support, taking just ten months to recoup the losses.
Stock Market Crashes Chart: The 2020 CoronaVirus Crash Lost 38% in 5 Weeks, But Only Took 10 Months to Recover.
What Caused the Stock Market Crash of 2020?
The Covid Crash of 2020 differed from previous crashes because a worldwide virus pandemic, SARS-COV-2/COVID-19, caused it. The measures introduced to fight the virus, especially lockdowns and social distancing, created a surge in unemployment and retail bankruptcies.
The stock market reacted quickly, with a 38% loss occurring in only five weeks, devastating the travel, leisure, and retail industries. Interestingly, the market recovered within ten months due to the rapid reaction of governments and central banks, who supported the unemployed and the industries with massive cash stimulus policies. The US issued $1.9 trillion, or 26% of its GDP, in stimulus, and the EU issued 11%, or €750 billion.
What Has Been Done To Avoid The 2020 Crash in the Future?
Avoiding this type of crash will be difficult as the cause is not financial corruption, lack of legislation, or systemic. This crisis highlighted the problems with the globalization of supply chains and the world’s reliance on China. Governments want to diversify out of China and increase self-sufficiency, especially in semiconductor and vaccine production.
The Causes of Stock Market Crashes
Crash
Cause
Cause
1929
Equity Bubble
Easy Access to Credit, Poor Institutional Risk Management
1973
Geopolitics
Oil Market Disruption
1987
Equity Bubble
2000
Equity Bubble
Easy Access to Capital, Poor Institutional Risk Management
2008
Asset Bubble
Easy Access to Credit, Poor Institutional Risk Management
2020
Global Pandemic
Lockdowns
5 Biggest Causes of Crashes
The analysis shows that 66% of stock market crashes are caused by asset and equity bubbles. In fact, in 3 of the 6 crashes, ease of access to investment capital or credit was used to fuel the asset and equity bubbles. The unrestricted access to capital was caused by poor institutional risk management. It is a cycle; low interest rates, deregulation of finance, and access to cheap capital lead to equity and asset bubbles.
Only two stock market crashes were unrelated to bubbles: the 1973 oil market disruption by OPEC caused a deep correction, and the SARS-COV-2 pandemic caused a massive drop in global demand and employment.
So, if you want to be prepared for the next crash, look for these five factors.
1. Equity & Asset Bubbles
The stock market crashes of 1929, 1987, 2000, and 2008 were caused by equity and asset bubbles. One could assert that the real cause of the bubbles was poor institutional risk management and easy access to credit, the effect of which was risky speculation. Economist Robert J. Schiller highlights this in his Nobel Prize-winning book Irrational Exuberance.
2. Easy Access to Credit
Low interest rates and easy access to credit allow economies to expand rapidly and increase demand and wealth generation. But there is a point at which, if not properly managed, all the capital sloshing around an economy needs to be invested somewhere. From market sentiment, fear, and greed, we know that money usually finds a home in the latest hot technologies or industries. In 2008, subprime lending caused a housing asset bubble; in 2000, greed and expectation in internet stocks, and in 1929, high-risk speculation in stocks using margins caused the collapse.
3. Poor Institutional Risk Management
In half of the stock market crashes, institutions’ poor management of risk was a major cause. In 1929, providing loans for margin trading in stocks fueled the bubble. In 2000, investment banks were responsible for pumping internet stocks and IPOs, which, combined with a lack of government regulatory oversight, caused the bubble. Finally, in 2007/8, irresponsible risk management from investment banks caused asset-backed securities to default because of sub-prime mortgage lending, causing a global financial crisis and a complete loss of confidence.
4. Geopolitics & Market Disruption
Wars, tariffs, and trade embargos contributed to the destruction of wealth, but they only contributed to one major stock market crash in the Western world. However, these remain major issues that hold back wealth creation, unemployment, and much-needed improvements in quality of life in developing nations.
5. Pandemic
The latest crash in 2020 introduced us to a new threat to our way of life: pandemic and disease. While we have paid the price in both lives and economically for our abuse of animals, this problem is only beginning.
3 Biggest Effects of Stock Market Crashes
We have looked at the causes of stock market crashes, but what about the effects?
1. Financial Loss
Financial losses are usually painful and quick when the market passes a major correction. Trillions of dollars get wiped off the value of stocks, companies, pension funds, and property. It is like the value disappears, and it is at this point we realize that our economies and wealth are based on a foundation of confidence. When that confidence erodes, so does our society and standard of living.
2. Inflation/Deflation
Since 2007, interest rates have been reduced to almost zero; this has helped fuel the recovery needed to restore wealth and boost confidence in the global economy. Low interest rates and vibrant global competition have helped to keep inflation low. We were at a point of price deflation in 2019, and in 2022, we are now facing negative interest rate charges on our money held in private bank accounts.
Economists have declared inflation dead, but it is rising due to the pandemic and the huge decrease in global production. High inflation over 4% is bad for wealth creation and stock markets. Central banks’ main tool for fighting inflation is increasing interest rates, but if they increase interest rates too much, asset and equity bubbles will burst.
3. High Unemployment
An unfortunate effect of stock market crashes is high unemployment and large increases in homelessness. This can take years to recover fully and causes huge amounts of mental and physical anguish to large swathes of the population.
Governments Are Managing Stock Market Crashes Better
The positive side to this history lesson on stock market crashes is that governments and central banks are improving at managing an economic crisis. The Obama response to the 2008 financial crisis was good and saved the financial system as we know it using stimulus, bailouts, and lowering interest rates. While most governments failed to lock down and react quickly enough to the COVID-19 virus, they did enact enough stimulus to stop massive and widespread poverty through unemployment, which resulted in a quick end to the Corona crash in 2020.
How To Avoid A Stock Market Crash
The total protection of your money from a market crash is impossible. However, you can minimize risks and protect most of your investments with a few precautions. Thus, keeping most of the assets in your 401K safe in a bear market is possible. However, you must be careful not to sacrifice your portfolio’s ability to grow to avoid risks.
Move to Cash in a Crash
Generally, stocks fall in value twice as quickly as they gain value. The best price gains are longer-term uptrends over multiple years. Crashes happen quickly and violently due to the panic and fear in the market. However, a real crash can be devastating to your wealth, luckily they are fairly infrequent.
Worst Stock Market Crash Years
The three worst crashes of all time were the great depression of 1929, the worst year being 1931 with a 47% drop, followed by 1937 with a 39% drop. The next worse was in 2008 with a 38% drop in one year.
The simple truth is that when there is a real stock market crash, most, if not all, stocks fall. So, diversification in safe stocks will not help you. Moving your portfolio to cash or government bonds is the best action. This means total protection from falling stocks.
However, there is one problem with moving to cash: the timing. If you move to cash too early and the market recovers quickly, you may miss out on stock market gains.
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What happens to bonds when the stock market crashes?
When the stock market crashes, the value of bonds typically increases. While stocks are more volatile and can experience large drops in value during a crash, bonds are considered a safer investment, and their value tends to hold up better. However, when a market crash is severe enough, it can cause even the safest bonds to suffer losses.
How can I avoid a stock market crash?
There are two ways to avoid a stock market crash. Firstly, do not invest in stocks. Secondly, you can use a backtested stock strategy that helps you know if a crash or large market correction is coming. Our MOSES strategy helps investors avoid stock market crashes.
What is the difference between a stock correction and a crash?
A stock correction refers to a temporary decline in the value of stocks between 5-20%, unlike a crash which is an abrupt and dramatic decline of 30%+ over an average of 17 months.
Will the stock market crash in 2023?
In 2023 the S&P 500 stock index has declined 27.5%, which by some standards means the market has already crashed in 2023.
Did the stock market crash during the covid pandemic?
Yes, the stock market did crash during the Covid-19 pandemic. In March 2020, markets worldwide experienced the fastest bear market decline in history, with the S&P 500 dropping 34% in just 33 days. Markets have since recovered somewhat; however, they remain volatile and unpredictable.
What is the best way to protect money during a crash?
The best way to protect your money during a stock market crash is to diversify your investments across different asset classes. This way, you can minimize the impact of a crash on your portfolio by diversifying your investments across stocks, bonds, ETFs, mutual funds, and other asset classes.
A Complete History of Stock Market Events & Crashes
A complete history of stock market events and their impact on the stock market from 1916 to today.
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In stock investing, dollar-cost averaging (DCA) is a great way for long-term investors to maximize profits and lower risk while staying fully invested in the market.
Dollar-cost Averaging is a method of investing in which an investor invests a fixed amount regularly (e.g., monthly) in a long-term investment. When the investment price decreases, the investor receives more shares for their money; when it increases, they get less. This averages down the cost per share, promoting a successful outcome.
Dollar-cost averaging is a commonly used investing strategy. If you regularly contribute to a retirement fund or your investment portfolio, you automatically use dollar-cost averaging. This regular contribution averages out the overall cost of the investment.
If the stock price decreases over time, the investor will receive more shares for their money, meaning the asset’s average price decreases. This averages down the cost per share, promoting a successful investing outcome. If the stock price increases, they get fewer stocks, increasing the average cost.
How To Protect Your Retirement Fund During a Crash
There is no foolproof strategy that will keep your portfolio safe. However, you can mitigate your risks with basic moves like diversification. The first strategy for protecting your nest egg is diversification. To explain, put your money in several places to avoid losing everything.
For instance, invest in different stocks and US Treasury Bonds. Examples of basic diversification are 20% tech stocks, 20% finance stocks, and 20% energy stocks. In addition, invest in several good dividend stocks to have money coming in. A great rule to follow is to have at least 50% of your 401K funds in dividend stocks.
Finally, having part of your funds outside of stocks will keep part of your money from a crash. Having 20% of your funds in CDs or Bonds can ensure you will have cash.
Researching and writing this analysis has helped me clarify my approach to handling stock market crashes. Firstly, we can avoid the crash by moving to cash, which is difficult because the stock market collapses quickly. Ultimately, if you are caught in a crash, a great way to manage it is to use Dollar Cost Averaging and keep investing through to correction; this lowers your average cost per share and means you pick up bargains along the way.
We have recovered from 6 major crashes; our first crash in 1029 took 23 years to recover from, 2008 took five years, and 2020 took 10 months.
Crash recovery can take time, so if you are close to retirement, diversify into bonds and secure assets to prevent too much loss.
With a wealth of experience spanning 25 years in stock investing and trading, Barry D. Moore (CFTe) is an author and Certified Financial Technician (Market Analyst) recognized by the International Federation of Technical Analysts (IFTA). Notably, he has also held executive positions in leading Silicon Valley corporations IBM Corp. and Hewlett Packard Inc.
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