Will There Be A Stock Market Crash in 2021?

The definition of a stock market correction is when markets fall 10%.  A stock market crash is where stock markets have fallen by 20% or more.

A bond market correction is when bond markets fall 5%.  A bond market crash is where bond markets have fallen by 10% or more.

Historically, since the 1950s there has been a stock market correction i.e. a 10% fall every 20 months or so, i.e. at least every 2 years.  There has been a full stock market crash by 20% or more every 7-10 years.

Looking at covid-19, stock markets crashed by an average of around 35% in March 2020.  Since then, in the US, the Dow Jones has grown by 91% since its low and the S&P 500 has grown by 70%.  Since March 2020, in Europe, the FTSE 100 index has grown by 45% and the German DAX by 89%.  In the Far East Japan has grown by 70% and in China, the Shanghai Composite has grown by 53%.

In addition, when you look at Price/Earnings ratios, they are double what the market ‘normal’ expectations.  This means equities are overvalued when comparing prices to earnings/profits/dividends.

Markets are clearly due for a correction.

That said, we are not sure.  Vaccination programmes around the globe are in motion.  Many developed market economies have been extremely successful in vaccinating their populations although there are fears that the Delta variant, currently ravaging its through the UK will soon hit other developed economies and fears also for the same in Japan with the Olympics due to start soon.

Logic tells us that we should be locking our profits in as a correction would appear imminent.  We simply cannot call it.  We believe that initially inflation will knock markets down and then they will recover again.  In addition, as the planet opens up to trade again, central banks and government will deliver stimulation to drive markets ever higher.

We move to 'amber'

In the short term, we personally are moving to amber (i.e. holding) for western developed markets and still green (investing more each month via drip feed feeding) in the Far East and Emerging Markets.  We expect the Delta variant to cause some market ‘wobbles’ but if immunisation is working, the covid-19 Delta variant will spread but be no more serious than the common cold or a bout of influenza (we certainly hope so).

You have a choice

• Lock in gains:  If your are cautious and believe in market cycles, you may wish to consider moving gains from the last 12 months from sectors that are at or near their year highs to cash park or indeed switch to undervalued markets that are still not near their record highs.
• Hold for the longer term:  If you are happy to ride out any market correction then this not a bad strategy as it is impossible to time the market and we believe the longer term trend is upwards.