October is now in the rearview mirror, much to the chagrin of investors. For the month, the iconic Dow Jones Industrial Average shed 5%, the broader-based S&P 500 (^GSPC -0.46%) dove 6.9%, and the tech-heavy Nasdaq Composite tumbled 9.2%. As a whole, it was one of the worst months for U.S. markets in years and absolutely the worst month for tech stocks in a decade.
Is a stock market crash on the horizon?
But here's the bigger question that retail investors and Wall Street are currently asking: Is the current stock market correction over? Given the many headwinds facing stocks and the U.S. and/or global economy, the answer may not be what investors want to hear.
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In no particular order, here are 25 reasons and/or scenarios that could cause the stock market to head substantially lower than where it's currently valued.
1. The ongoing trade war with China escalates, raising material costs, curbing consumer spending, and hurting corporate profits.
2. Corporate share buybacks fail to boost per-share profits as much as expected.
3. Democrats win one or both houses of Congress, hurting the chance of Republicans to pass further fiscal stimulus legislation.
4. The federal budget deficit continues to soar, placing added emphasis on our growing national debt, currently at more than $21 trillion.
5. The U.S. dollar keeps strengthening, placing pressure on exports and worsening the U.S. trade deficit with foreign countries.
6. FANG stocks – that's Facebook, Amazon.com, Netflix, and Google (now Alphabet) -- continue to draw the ire of short-sellers.
7. The Federal Reserve gets overly aggressive with interest rate hikes, sapping lending demand.
8. The yield curve flattens, reducing the desire of banks to lend money.
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9. Interest rates rise, providing incentive for investors to ditch volatile equities for the safety of bonds and bank CDs.
10. Britain falls into a "hard Brexit." With few or no trade deals in place, the U.K. falls into recession, taking the U.S. and other developed countries with it.
11. China's economy experiences its slowest growth in decades, placing pressure on its ability to import from the U.S. and other key players.
12. The U.S. housing market shows signs of weakening, with important markets like California seeing a steep drop-off in new home sales.
13. Credit-card delinquencies begin to trickle higher, demonstrating the inability of consumers to meet their payment obligations.
14. The subprime auto loan market bubble bursts.
15. The U.S. goes to war, regardless of the reason or the country in question.
16. An errant tweet from President Trump stirs Wall Street and investors.
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17. A flash crash caused by computer algorithms results in substantially reduced liquidity and perpetuates a rapid move lower in the stock market.
18. Investor emotions (especially those of day traders) get out of hand and send traders running for the exit.
19. The unemployment rate, which is at a 49-year low, begins to rise, signaling peak employment and the possibility of a weakening economy.
20. Disruption in important oil-producing countries causes crude prices to skyrocket or plunge. Either way, it could create sticker shock or job losses and adversely impact the U.S. economy.
21. U.S. GDP data shows slowing growth, which, in turn, cools investor expectations for stocks, sending them lower.
22. Inflation comes in far lower than expected, signaling that businesses have little pricing power. The prospect of deflation could wreak havoc on corporate earnings, causing the market to fall.
23. The U.S. debt ceiling is hit (yet again), but the political divide in Congress becomes too great for lawmakers to overcome, allowing the shutdown to perpetuate for months.
24. European debt crisis 2.0 hits, with countries like Italy unable to dig their way out of years of loose borrowing.
25. A widely followed pundit, such as Warren Buffett, sounds the cry of the stock market being overvalued.
In other words, there is no shortage of reasons the stock market could tumble from its recent all-time highs. But it's also important that investors recognize the market's three constants.
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Three stock market constants you need to know
The first of those three constants is the reality that we're never going to know ahead of time when a correction will occur, how long it'll last, how steep it'll be in terms of percentage decline, or, ultimately, what causes it in the first place.
Above, I've listed 25 seemingly logical reasons that the stock market could crash. Each of them is reasonable in its own context. And yet there's a decent chance that the next stock market correction or crash will arise because of a reason not listed above. Call it the stock market's "X-factor." Whatever it is, corrections usually take the market by storm, and they're rarely ever forecast in advance with any long-term accuracy.
Second, it's important for investors to understand that while we can't know in advance how long a correction will last, data shows that they tend to be quick more often than not. Of the 36 stock market corrections since 1950 in the S&P 500 (not counting our newest correction), 22 have found their bottom in 104 or fewer days. Since 1982, just four corrections have lasted longer. Put plainly, even though corrections are unpleasant from a paper-loss perspective, they're a normal part of the market cycle and rarely last that long.
Third, and perhaps most important, investors are batting 1.000 over the long run. Despite 36 corrections in the S&P 500 over the past 68 years, each and every previous decline has been erased by a bull-market rally. This demonstrates that the most important variables to success in investing are patience and time. If history holds true, this correction will also be erased by a bull-market rally at some point in the future.
In other words, stop worrying so much about short-term volatility and "what ifs" and start thinking about what great companies you can scoop up that'll deliver for you over the long run.
