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History Suggests a Stock Market Crash Is Likely: 3 Stocks to Buy if One Happens

By Sean Williams – Aug 14, 2021 at 5:51AM

Key Points

  • The previous four times the S&P 500 was this richly valued, it declined by at least 20%.
  • The benchmark index has averaged a double-digit percentage correction every 1.87 years since 1950.
  • Every single crash or correction has eventually been erased by a bull market rally.

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Crashes and corrections are commonplace. But they're also the perfect opportunity for investors to put money to work in winning businesses.

I have a reality check for investors: A stock market crash is likely.

Although the benchmark S&P 500 (^GSPC -0.12%) hasn't undergone a single correction of even 5% over the past nine months, a case is building, according to history, to suggest that a double-digit percentage crash or steep correction may be on its way.

A person circling and drawing an arrow to the bottom of a steep decline in a stock chart.

Image source: Getty Images.

History may not be the market's friend in the near term

For example, history has shown that every bounce back from a bear market bottom is inherently choppy, and not the straight line upward that we've seemingly enjoyed in 2021. Each of the previous eight bear markets prior to the coronavirus crash featured at least one double-digit percentage pullback within three years. In fact, five of the eight had two such double-digit declines. Bouncing back from a bear market is a process that's often turbulent and takes time. With the S&P 500 practically doubling from its March 2020 low, history would suggest a significant pullback is growing likelier by the day.

The S&P 500's Shiller price-to-earnings (P/E) ratio is another cause for concern. The Shiller P/E ratio takes into account inflation-adjusted earnings over the previous 10 years. As of Monday, Aug. 9, the S&P 500's Shiller P/E was a lofty 38.5, or well over double its 151-year average of 16.84. 

But what's far more concerning is that in the previous four instances where the S&P 500's Shiller P/E topped and sustained 30, the index subsequently declined by at least 20%. At least in the short term, history is not on the market's side.

As one final point, data from market analytics company Yardeni Research shows that the S&P 500 has undergone 38 crashes or corrections of at least 10% since the beginning of 1950. This works out to a double-digit percentage drop of at least 10% every 1.87 years. Even though Wall Street doesn't adhere to averages, the writing would appear to be on the wall that a stock market crash is likely.

A person writing and circling the word buy underneath a dip in a stock chart.

Image source: Getty Images.

Stock market crashes are always a buying opportunity for patient investors

While this might sound like a call for alarm, it actually isn't. You see, every single stock market crash and correction throughout history has proven to be a buying opportunity. As long as you have a long-term mindset and are buying stakes in high-quality companies, a crash is nothing more than an opportunity to put your capital to work at a discount.

If history does serve as a guide and a stock market crash does occur, the following trio of stocks would be perfect for investors to add to their portfolios.

NextEra Energy

For more conservative investors and/or income seekers, the U.S.'s leading electric utility stock, NextEra Energy (NEE 0.44%), would be the perfect addition if a stock market crash strikes.

Typically, electric utilities are slow-growing entities that provide highly predictable cash flow. After all, electricity is a basic-need service for homeowners and renters, which means demand doesn't change much from one year to the next. This transparency is a big reason utility stocks provide above-average dividend yields.

However, NextEra Energy isn't like a traditional utility stock. It's differentiated itself by investing aggressively in renewable energy projects. It's already the leader in solar and wind capacity in the U.S., and has plans to spend between $50 billion and $55 billion, in aggregate, between 2020 and 2022 for new infrastructure projects. Although green-energy solutions aren't cheap, they're helping to lower NextEra's electric generation costs, which has ultimately lifted its compound annual growth rate to the high single digits for more than a decade.

In addition to bringing fast renewable energy growth to the table, NextEra also has regulated utilities (i.e., those not powered by renewable energy). This is a fancy way of saying that price hikes must be approved by state-level public utility commissions. This might sound like a hassle, but it's actually fantastic news since it keeps NextEra from being exposed to volatile wholesale electricity pricing.

NextEra is all about leading-edge innovation and cash flow predictability, which makes it a smart buy if the stock market heads lower.

A key in a lock surrounded by dozens of alphanumeric codes.

Image source: Getty Images.

CrowdStrike Holdings

For aggressive growth investors, a stock market crash or steep correction would be an opportune time to take a position in cybersecurity specialist CrowdStrike Holdings (CRWD -0.06%).

One of the most important things to understand about cybersecurity is that it's evolved into a basic need service. No matter how well or poorly the U.S. economy is performing, hackers and robots don't take a day off from trying to steal corporate and consumer data. This leads to steady demand for cybersecurity solutions in any environment.

What's allowed CrowdStrike to stand out from its peers is the company's cloud-native Falcon platform. Falcon relies on artificial intelligence (AI) to grow smarter and more efficient at recognizing threats over time. According to the company, it oversees approximately 6 trillion events on a weekly basis. This cloud-based, AI-focused approach makes Falcon a safer and often more cost-effective solution to countering cyberattacks, relative to on-premises security options.

But you don't have to take my word for it -- all you have to do is take a closer look at CrowdStrike's operating performance to see that its solutions are resonating with end users. CrowdStrike's subscribing customer count has climbed from 450 to 11,420 in five years (through fiscal first-quarter 2022), and a whopping 64% of its customers have purchased at least four cloud-module subscriptions, up from 9% in the comparable quarter four years ago. With growth like this, it's no wonder CrowdStrike hit its long-term subscription gross margin target so early in its existence. 

Smiling person holding credit card while looking at an open laptop.

Image source: Getty Images.


A third stock that would be perfect to buy if the market were to turn lower is e-commerce giant Amazon (AMZN -1.44%). Although, to be fair, there hasn't been a bad time to buy Amazon in more than two decades.

As many of you are aware, Amazon sits at the top of the pecking order when it comes to online retail. An April report from eMarketer estimated that Amazon's marketplace would account for 40.4% of U.S. e-commerce in 2021. For context, that's a little over 33 percentage points higher than the next-closest competitor.

Of course, retail margins are notoriously small. Amazon has made up for this by selling 200 million Prime memberships worldwide. The fees Amazon collects from these memberships help it to undercut brick-and-mortar retailers on price. It also doesn't hurt that paying a membership fee encourages these more than 200 million people to spend more and stay within Amazon's ecosystem of products and services.

Perhaps even more impressive is Amazon's growth outside of retail. Aside from the noted growth in subscription services (Prime), which jumped 32% in the second quarter from the prior-year period, revenue from advertising and cloud infrastructure segment Amazon Web Services rose 83% and 37%, respectively, in Q2. These are all considerably higher-margin operating divisions, and are therefore more likely to have a positive effect on Amazon's cash flow generation.

Despite being one of the world's largest publicly traded companies, Amazon still offers plenty of upside.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Sean Williams owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and CrowdStrike Holdings, Inc. The Motley Fool recommends NextEra Energy and recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

Stocks Mentioned Stock Quote
$94.13 (-1.44%) $-1.37
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
$4,071.70 (-0.12%) $-4.87
NextEra Energy Stock Quote
NextEra Energy
$85.20 (0.44%) $0.37
CrowdStrike Stock Quote
$124.00 (-0.06%) $0.07

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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