Why Stock Market hasn’t crashed yet?
In recent days, one of the smartest and wealthiest people in the world predicting that the next stock market crash is looming. Is the stock market really going to crash? YES!!! There you have it. But the biggest question is WHEN?. “Without a date, all predictions will eventually come true”. A year ago at the same time, the market was standing on thin ice. Now the markets have rocketed to all-time highs and investors are exuberant at the prospects for a full economic recovery as the COVID-19 pandemic comes under control.
“Bubble Will End in a Huge Market Crash”
“Reality will set in soon”
“Market bubble will burst”
You might have seen this kind of headline or news all over the internet or media. When you constantly read these headlines, you sell all your stocks or you hold your further investment until the market collapses because of fear. Now you should ask yourself that if you cannot withstand 50% of the stock market fall why do you buy the stock in the first place. Rather than being a victim in the stock market crash, set yourself to sail it through a downturn. In 1929, the Great Depression occurred due to economic decline which leads to panic selling and it occurred again in 1987 (Black Monday). After a couple of events, a safeguard has been put in place to avoid stockholders to sell their assets due to fear. However, it didn’t help prevent another huge market crash in 2000 (Dotcom Bubble Burst) in 2008 (financial crisis), and recently in 2020 due to the Covid-19 pandemic.
One of the safeguard techique: A circuit breaker is an emergency-use regulatory measure to temporarily halt trading on an exchange.
Every stock market crash proves one thing, What goes down must come up. The stock market crash didn’t stop the investors from buying the stocks again. History also shows us that every crash throughout history has been a major buying opportunity. If you buy great companies at a discount and allow your investment thesis to play out over time, you have a very good chance of building wealth.
Why are the billionaires sounding the alarm on the market crash?
The P/E ratio tells an investor how much a buyer is willing to pay for $1 of a company’s earnings. This ratio is used by investors and analysts to evaluate the stock, sometimes the whole stock market. There are two ways to calculate the P/E ratio (Cost price per Share(P) divided by Earnings per Share). Investors and Analysts use complex formulas, and each and everyone interprets them distinctly. Here we are gonna analyze the stock with a P/E ratio, whether the company’s share is the potential to buy or hold. The first traditional method, the cost price of the share divided the company’s trailing 12 months earnings. For example, the current cost price of the company is $50, and Earning per share 12 months ago was $1.50, the price-to-earnings ratio is 33.33. Instead of using the trailing method, if you calculate the same P/E ratio with the forward earning ratio, then the P/E ratio will always be low because of higher Earning per share i.e. $50 cost price / $2 EPS, then P/E ratio is 25.
What does the P/E ratio prove? Stocks with higher P/E ratios can be found in rapidly growing industries. Investors see the stocks as buy or hold if P/E ratios are high. Sometimes the value investors hunt for companies with lower P/E ratios, with shares selling with a lower value.
“A low P/E can indicate that a stock is a bargain if the firm has strong fundamentals (such as profitability). But a low P/E can also indicate that the firm is appropriately valued due to poor future prospects”
The same analysis can be done on the entire stock market. By adding up the price of every share in the S&P500, and comparing that to the sum of all earnings-per-share generated by those companies, you can easily calculate the P/E ratio of the US stock market. The current S&P500 10-year P/E Ratio is 37.4. This is 90% above the modern-era market average of 19.6, putting the current P/E 2.3 standard deviations above the modern-era average. This suggests that the market is Strongly Overvalued. This is the reason that many high-profile investors panicking about the entire stock market. When the stock market is at the top, the stock looks cheap due to the low P/E ratio. At the same time. the stock market is at the bottom, the stock looks expensive because the earnings per share are temporarily depressed. Even though the P/E ratio is the starting point to evaluate the stocks, you need to further analyze the company’s profile, industries, and economy.
How to invest with stocks at an all-time high?
The only mantra is “No matter what, You should not stop your investment”. If your goal is to invest it for the long term, and your vision is clear about things that will not change it fundamentally, you are optimistic about investment strategy. If you are a long-term investor, then dont be influenced by the news or media. The market is supposed to go up over the long term. For decades, that’s primarily what it’s done — with plenty of crashes and head-fakes along the way. That bumpy road is the justification, or the price of admission, for those higher returns that you expect out of the stock market. You can’t expect to get high returns unless you’re putting money at risk.
As a long-term investor, you should not be more concerned about the P/E ratio with 12 months of trailing EPS or forward EPS. It is more useful to use the Cyclically Adjusted Price Earnings (CAPE) ratio.
There is a detailed study regarding the P/E ratio vs P/E|10 ratio to understand whether the stock market is overvalued or valued over steady growth. Check out the below link.
https://www.currentmarketvaluation.com/models/price-earnings.php
The legendary investor Peter Lynch may have said it best:
“Far more money has been lost by investors preparing for corrections (Stock market crash), or trying to anticipate corrections, than has been lost in corrections themselves.”
