It's the ultimate doom, waking up and reading the headline: Stock market crash.
One can only think of those tied up in the infamous downturns – the 1929 crash and the global financial crisis (GFC) of 2008, for instance.
With the S&P/ASX 200 Index (ASX: XJO) hitting new highs in 2024, some argue investors are ignoring the economic realities of the situation.
Many might suggest the current global situation means the bull market might be on borrowed time. But is there a real threat of a full-blown crash? Let's explore what's going on.
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Why some experts are sounding alarms
While the ASX 200 has been performing well, experts believe we could be heading towards a significant downturn. Maybe even a stock market crash.
Universa Investments warns that the stock market is entering "black swan" territory.
First coined by former options trader Nassim Taleb in 2001, a black swan event describes a situation where unexpected events lead to market collapse. Often, the problem is obvious in hindsight.
The GFC of 2008/2009 was considered a black swan event. Events of that era came as a surprise – not all, but many – and almost led to a global financial meltdown.
Universa Investments says the market is overlooking several major risks that could send stocks lower, according to The Australian Financial Review.
Chief among these is the potential for an economic slump on a global scale, even though most are lowering their expectations for a recession.
Goldman Sachs reduced its probability of a US recession from 25% down to 20% in an August note to clients. It said the July and August data "showed no sign of a recession".
Universa says the big risk is that investors are overly confident due to resilient corporate earnings and a cycle of central bank rate cuts.
Instead, Universa says the market is in a "Goldilocks zone". Per the AFR:
When the yield curve disinverts and then unverts, the clock starts ticking and that's when you enter black swan territory.
Black swans always lurk, but now we're in their territory.
Key indicators to watch for a potential stock market crash
So, what are the signs that a stock market crash could be imminent? As Universa said, one major factor is the economic environment.
This is particularly true as actions of the US Federal Reserve ripple through global markets, including the ASX.
As the Fed cuts interest rates to stimulate the economy, there's concern that this might come too late to prevent a slowdown.
US bank Wealth Management also suggests that what it calls "external risks" must be factored in as well.
External risks must also be considered. Current issues include the impact of global tensions highlighted by the Israel-Hamas conflict and the Russia-Ukraine war.
The heated lead-up to what appears likely to be a contentious presidential election and the candidates' policy distinctions are also beginning to draw more investor attention.
The firm also recommends keeping an eye on inflation and labour market trends, "consumer and business spending", and the growth of corporate profits.
Is a stock market crash on the way?
While a stock market crash is never guaranteed, it's important to remember that markets are cyclical.
The ASX 200 has seen strong gains this year, but, corrections are a natural part of this market cycle. Whether or not a 'crash' will arrive is another story.
That said, Australian shares have historically recovered from market corrections over time. Long-term investors realise this already.
