Boom or bust? Will markets crash?

There's nothing more frustrating than hearing very different opinions from experts about where the economy, stock market, and interest rates are headed next. All you want to do is prepare and while one expert says boom the other says bust. The first thing to understand is that no one truly knows if and when a stock market crash may occur, no matter how convincing they sound on on TV. So before making any doomsday plans, let’s look at the facts we do know and how they might affect what we decide to do with our money.

1) The stock market is expensive by many measures after years of market gains. One measure used to price the market is the price/earnings ratio of the S&P 500. Historically this number averages in the 14-16 range and today it stands at 22.

2) There are significant risks to the stock market in the world today. Covid and its variants are an ever present danger to businesses and lives across the world. The Evergrande debt default in China has the potential to cause ripple effects through the world economy. Unrest in areas like Afghanistan and even on American soil, threaten the health of our economy.

3) Inflation is becoming an issue after years of silence. When inflation increases, the Fed may be required to raise interest rates to combat it. Higher interest rates tend to cause declines in stock and bond prices.

4) Fed monetary policy of injecting money into the economy to keep things afloat during the pandemic will be coming to a close (tapering) beginning later this year. Without artificial stimulus, economic growth may sputter.

While all four items mentioned above present risks to the market, there is good news as well. Consumers are heading back into stores and workers into the office which will help return us to a new normal. But at this point in time risks far outweigh opportunities and it feels like we are soon headed for a market correction.

Advice during these times tends to be ‘stay the course’ as any attempt to time the market is unlikely to be successful. Long-term investors can be confident that any losses during a correction will be recovered over the long-term. However if you have significant assets in stocks or bonds that are needed for the short-term, there is nothing wrong with selling some shares and holding money in cash that can be spent or re-invested later. I would caution against selling everything unless it were all needed imminently.

Markets always boom and bust and the important thing is to keep a level head and not overreact. Should there be a market correction, we will get through it just as we have every other one in history.