The short answer I, and any credible market-watcher, will give is: I don’t know. Markets are by their nature unpredictable. A few supposed seers correctly guessed the last bear market, and others will probably foresee the next one. The fact is that someone, somewhere, is always predicting a crash. Like broken clocks, they will be right every now and then.
That said, I can share some certitudes that come from covering the markets for more than three decades.
What we do know about the stock market
The first thing to keep in mind is that major market downturns don’t necessarily manifest over a matter of days. Sometimes stock prices just start slipping and keep going. During the dot-com bust, the Nasdaq Composite Index took 31 months to lose 78% of its value, between March 2000 and October 2002, with the odd bear-market rally in between.
Second, what happens in the markets seldom coincides with what’s happening in the economy. “Black Monday” in 1987 took place more than three years from the nearest recession. Markets are forward-looking, and they can fall simply because their earlier expectations were too optimistic. Will there be a recession in Canada this year? Quite possibly, but that will have little bearing on your stocks’ performance.
Third, the best days to be in the market are often right around the bottom. If you’re not invested at that point, you’ll miss them. And it’ll cost you: in 2022—the last lousy year in the markets—TD Asset Management conducted an exercise showing that $10,000 invested in the S&P/TSX Composite on December 31, 1991, would have grown to $60,423 after 30 years. But if you failed to participate in the best 1% of trading sessions over that period, you’d have lost money and be left with just $3,747 on December 31, 2021.
In other words, even if you could predict a crash in advance, you’d need to be right a second time, knowing exactly when to get back into the market, to really capitalize.
Canada’s best dividend stocks
The four horsemen of the financial apocalypse
Major market meltdowns are almost always accompanied by four phenomena:
- Overvaluation
- Imbalance
- Shock
- Loss of confindence
Here’s how they work together.
