Should You Be Worried About a Stock Market Crash? Here’s What the

Over the past 19 months, investors have witnessed history on both ends of the spectrum. They’ve navigated their way through the quickest decline of at least 30% in the history of the storied S&P 500 (SNPINDEX:^GSPC), and they’ve subsequently reveled in the strongest bounce-back rally from a bear market bottom of all time. Since bottoming out on March 23, 2020, the benchmark index has more than doubled in value.

But this monster rally begs the question: Is another stock market crash or potentially steep correction around the corner, and should you be worried about it?

The answer, based on an abundance of data, truly depends on your investing style.

Image source: Getty Images.

If you’re a short-term investor/trader, you have reason to worry

To be upfront, we’re never going to know precisely when a stock market crash will begin, how long it’ll last, or how steep the decline will be. We also rarely know what’ll cause a crash or steep correction until after it’s begun. Thus, expecting a big decline in the market is a bit of an inexact science. With that being said, there are a number of figures which suggest a stock market crash could be on the horizon.

For example, the performance of the S&P 500 following each of its previous eight bear market bottoms, dating back to 1960, is telling. In the three years following each of these bear market bottoms, the broad-based index pulled back by at least 10% once or twice. We’re now nearly 1.5 years removed from the coronavirus crash bottom, and the S&P 500 has yet to endure a double-digit percentage decline. In fact, we’ve now gone 10 months without even a 5% pullback. Bouncing back from a recession has never been this smooth or easy.

Valuation is another key concern. As of Sept. 13, the S&P 500’s Shiller price-to-earnings (P/E) ratio was 38.6, representing a nearly two-decade high.  The Shiller P/E takes into account inflation-adjusted earnings over the past 10 years. There have only been five times over 151 years when the Shiller P/E hit 30 and stayed above this level for any length of time, including right now. In the previous four instances, the S&P 500 subsequently fell by at least 20%.

Want more evidence that the market could be teetering on the brink of a big correction? Take a closer look at margin debt — i.e., the amount of money being borrowed by investors to invest in or short-sell securities. Over the past quarter of a century, there have been three instances where margin debt rose by at least 60% in a single year: Directly before the dot-com crash, right before the Great Recession, and in 2021.

While this could be purely coincidental, the precedence suggests a margin call-induced crash is a possibility.

Long story short, if your average stock holding time is measured in days, weeks, or months, a market crash is something you should genuinely be concerned about with the S&P 500 rallying more than 100% in less than 18 months.

Image source: Getty…