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 (^GSPC -0.09%), 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.
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.
History suggests long-term investors have nothing to fear
On the other hand, if your holding periods are measured in years or decades, stock market crashes aren't something to fear. In fact, they're historically an excellent time to put your money to work.
To begin with, even though stock market crashes and corrections are quite common, they don't last very long. Of the 38 double-digit percentage declines in the broad-based S&P 500 since the beginning of 1950, the average time it's taken to go from peak to trough is 188 calendar days (about six months).
The average length of corrections has grown even shorter since computers became mainstream on Wall Street and information could be easily disseminated at the click of a button. Since the mid-1980s, the average correction length has dipped to 155 days, or about five months.
Though big moves lower in the market can pull at our heartstrings as investors, it's a lot easier to remain invested with the understanding that bull markets last considerably longer than bear markets. It's a simple numbers game that absolutely favors optimists.
Want more proof? Earlier this year, Crestmont Research released a report looking at the 20-year rolling total returns ("total," as in including dividends paid) for the S&P 500 between 1919 and 2020. What Crestmont found was that every single ending year in this 102-year period would have produced a positive total return, as long as investors held for 20 years. Only two end years (1948 and 1949) yielded an average annual total return of 5% or less, while more than 40 of these 102 end years produced an average annual total return of 10% or higher.
The simple fact of the matter is this: If you buy great companies and hang onto them for long periods of time, you have an excellent chance to build wealth. The longer you're willing to hold, often the greater your chance of making serious money.
Buy stakes in dominant businesses and let time be your ally
Inevitably, a stock market crash will happen. Crashes and corrections are a natural part of the investing cycle and the admission you pay to participate in one of the world's greatest wealth creators. When the next crash does occur, buying into great companies and letting time be your friend should be a moneymaking recipe.
For instance, Mastercard (MA 1.24%) is about as steady as they come among financial stocks. As one of the world's leading payment processors, Mastercard benefits from long periods of economic expansion. If economies are growing, it likely means businesses and consumers are spending more. Plus, with Mastercard avoiding lending and focusing strictly on payment processing, it isn't exposed to rising credit delinquencies when recessions do occur. This is why it bounces back so quickly in a post-recession environment.
Growth-oriented long-term investors might consider cybersecurity stock CrowdStrike Holdings (CRWD 5.46%), as well. Hackers don't care about stock market turmoil, which is why protecting consumer and enterprise data is a basic need service. CrowdStrike's cloud-native Falcon platform oversees approximately 6 trillion events weekly and leans on artificial intelligence to grow smarter at identifying and responding to threats over time. In less than five years, CrowdStrike's subscriber count has skyrocketed from 450 to more than 13,000, and it's already hit its long-term subscription gross margin target.
Even Teladoc Health (TDOC 1.72%) would be a smart buy-and-hold stock if the market crashed or corrected notably. Teladoc's virtual visit platform is set to change the face of personalized care by making it easier for patients and physicians to connect.
Ultimately, this should lead to improved patient outcomes and less money out of the pockets of insurers. With Teladoc also scooping up leading applied health signals company Livongo Health last year, it has a means to differentiate its platform and cross-sell to an established base of chronic-care patients.
When the next crash or correction strikes, go on the offensive and let time be your ally.