Is the Stock Market About to Crash Again?

Thursday brought another bout of volatility to the stock markets, which started the day on the upside but then reversed to move sharply lower. New data on first-time unemployment claims didn't show the improvement that everyone hoped to see, and there's lingering doubt about what impact the COVID-19 pandemic could have, even as case counts across the nation are starting to trend lower. By the end of the day, the Dow Jones Industrial Average (^DJI 0.40%), S&P 500 (^GSPC 1.10%), and Nasdaq Composite were all down around 1.5% to 2%.

Today's stock market

Data source: Yahoo! Finance.

After having been dead wrong ever since March, bearish investors have once again gone on the offensive. They're making a compelling case for why market participants should be cautious right now. Yet it's important to realize that many of the things that pessimistic investors say hold true much of the time but don't keep the market from gaining ground steadily over the long run.

Image source: Getty Images.

The case for a stock market crash

You don't have to work hard to put together a good-sounding set of facts to support a view that the stock market needs to fall sharply soon. Here are a few of the obvious points:

• After having justifiably dropped during February and March, the market's subsequent rebound to all-time record highs for the S&P 500 and Nasdaq came without any clear answers on when there'll be an end to the COVID-19 pandemic.
• In particular, high-flying stocks like tech giant Apple (AAPL 0.52%) and electric-vehicle pioneer Tesla (TSLA 0.65%) have risen to unprecedented heights. Even those who loved Apple a couple of years ago as a value play now believe that the stock might have gotten ahead of itself. And with Tesla missing its chance for now to join the S&P 500 index, it'll need to keep proving itself with its fundamental business in order to keep investors satisfied.
• Rightly or wrongly, a lot of investors pay attention to seasonal factors in anticipating market crashes. Many of the worst declines in market history have come during the early fall months.
• The last two months of the presidential election campaign are almost certain to get nasty. That could bring surprises to the markets, with unpredictable effects based on how investors see the election playing out.
• Different parts of the market are behaving very differently from others. Even as tech has held up well, sectors like energy and financials remain significant underperformers.
• There's little room for further help for the economy or the stock market. Interest rates are at extremely low levels, and tax rates are much more likely to rise in the coming years than to fall further.

Add up all these factors, and they paint an ugly picture.

We've seen it all before

However, the thing to remember about this argument is that you could have made a very similar case at countless times over the past decade. The 10-year bull market that followed the financial crisis took everyone by surprise, especially the extent to which stocks surpassed their previous highs. There were plenty of things to worry about along the way, but the strength of the market won out.

There's always a chance that the drop we've seen in the past week will turn out to be the beginning of something bigger. Yet giving up on stocks entirely isn't the right answer. Instead, simply accept that you'll have to deal with occasional losses in exchange for the huge long-term gains you can get in the stock market. That's a prize worth waiting for.