Could the stock market really crash 40%?

Could the stock market really crash 40%?

Whether you've invested in ASX shares or international shares, it's a frightening figure.

And with the US Federal Reserve likely to hike interest rates in the world's top economy by another 0.75%, or perhaps even 1%, tonight, it's a question that's on many investors' minds.

The Fed's series of 2022 rate hikes have already pushed the NASDAQ-100 Index (NASDAQ: NDX) down 28% this calendar year. Coupled with the rate rises from the RBA, that's also sent the S&P/ASX 200 Index (ASX: XJO) down 11% year-to-date.

So, is a stock market crash still looming?

Dr Doom warns of 40% stock market crash

Nouriel Roubini, CEO of Roubini Macro Associates, has long been dubbed Dr Doom for his penchant for bearish forecasts.

While he hasn't gotten all those forecasts correct, he did nail the 2008 GFC well before it fully unfolded.

Now, as Bloomberg reports, Roubini sees a "long and ugly" global recession taking hold by the end of this year and lasting through 2023.

He also believes this will lead to a full-blown stock market crash, with "a real hard landing" leading to a potential 40% fall in the S&P 500 Index (SP: .INX). A stock market crash that would likely be mirrored on the ASX.

"Even in a plain vanilla recession, the S&P 500 can fall by 30%," Roubini said.

Of particular concern are the mountains of debt held by governments and corporations. Debts that will get far more costly to service as interest rates shoot higher from their recent historic lows.

According to Roubini (quoted by Bloomberg):

Many zombie institutions, zombie households, corporates, banks, shadow banks and zombie countries are going to die. So, we'll see who's swimming naked.

Roubini also cites numerous supply side issues that are likely to continue putting upward pressure on prices. These include Russia's invasion of Ukraine, alongside China's COVID-zero lockdown policies crimping output in the world's most populous nation.

With these factors in mind, Dr Doom believes the Fed will "probably have no choice" but to eventually raise rates to around 5% next year.

And investors hoping for some helpful stimulus to avoid a stock market crash will be left wanting. "If you do fiscal stimulus, you're overheating the aggregate demand," he said.

"It's not going to be a short and shallow recession, it's going to be severe, long and ugly," he said. Adding that, "You have to be light on equities and have more cash."

Of course, not everyone agrees.

Take the long-term investing view and sleep well

Rather than pen my own takeaway here, I'll defer to The Motley Fool's chief investment officer, Scott Phillips.

Writing in a Take Stock yesterday, Phillips said that "worrying about volatility or 'watching' the markets" are not things he does.

"The truth is that I can't remember ever being kept awake by the stock market," he said. "And I invested during the dot.com boom and bust. I invested during the GFC. And I invested during the COVID [stock market] crash."

Phillips admits these weren't easy times, with ASX and international share portfolios often deeply in the red.

However, his restful nights when others were tossing and turning worried about a stock market crash were a result of the historical truth of investing.

"The lesson of history on the stock market is that compound gains of around 9% per annum have been the norm," he said. "That includes all three crashes – dot.com, GFC and COVID."

Philips said investors should certainly expect market volatility, just as in the past. But he noted, "Patiently investing – saving, adding, and waiting – has been an extraordinary way to build seriously impressive long-term wealth."

Taking a multi-decade investment horizon helps put some perspective on any potential pending stock market crash.

Doing so, Phillips said, "Whatever happens today, tomorrow, this year or next year is all but irrelevant".

"I expect that in 2052, we'll look back at 2022 and wish we'd all invested more money, today," he added.