06/10/2016
Prepared for the ‘Impending’ Stock Market Crash?

Prepared for the ‘Impending’ Stock Market Crash?

It’s widely believed that the housing collapse and the ensuing Great Recession were created by three main ingredients: a lack of regulatory enforcement and oversight, poor risk management, and short memories. Regulatory enforcement has improved thanks to the Consumer Financial Protection Bureau, and the housing market has risen at a stable and steady pace since the dark days of 2008.

But whenever one recession ends, we know throughout the recovery that another crash will be coming – the only question is when. Since 1960, the U.S. economy has slid into recession about once every 7 years. Now, bears have started to wonder if there is a crash around the corner. Currently, the chances of a recession are low, and if economic growth accelerates from its sluggish pace of 2015, the bull market should continue, although likely at a modest, single-digit rate.

Officially, a recession (a contraction in real gross domestic product) is designated by economists of the Business Cycle Dating Committee within of the National Bureau of Economic Research, a private, non-profit enterprise. In general a bear market exists when market averages decline at 20% or more. A market crash is defined as a decline of 20% or more on the S&P 500 lasting longer than 12 months.

According to that definition, there has only been one market crash that wasn’t accompanied by a resulting recession over the past 35 years. It was a 12-month decline of greater than 20% occurring from August 1987 to August 1988. This period would not be considered a crash if it weren’t for the largest one-day plunge in U.S. history – Black Monday, October 19, 1987, when markets tumbled over 20% in a single day.

If we treat the Black Monday-sparked crash as an outlier, we are left with only three market crashes, and one near crash, over the past 36 years. All four recessions were preceded by a stock market decline, with that decline becoming a crash once the recession began.

● 1982 – The first crash corresponded with the major recession of 1981-82.
● 1991 – The second was followed by the recession of 1990-91, which sparked a near crash, as the S&P reached negative 17% in September 1990.
● 2001 – We may think the market was hammered by the terrorist attacks on September 11, 2001, but in reality, there was already a 12-month S&P index decline of more than 20% by March 2001. The plunge following 9/11 was only half as great. Economic recovery was nonetheless sluggish, and both the market and gross domestic product growth didn’t rebound until early 2003.

● 2008 – The market crash coinciding with the Great Recession of 2008-09 was easily the steepest of the bunch, just as the Great Recession was the worst economic downturn since the Great Depression of the 1930’s.

Though the economic data over the past couple months hasn’t been the greatest, there’s a world of difference between a crash/recession and a tepid market. For the moment, all signs point toward the latter, not the former. To develop a customized wealth management plan designed to weather the next downturn, look on further than OptiFour Integrated Wealth Management.

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