Could a stock market correction, or even a crash, be coming soon? The answer is an unequivocal yes — because corrections or crashes happen every few years. They’re to be expected.
Given that, we should all think about what the best investment move is for us.
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Why a crash?
Personally, I can think of a number of reasons why a pullback could be coming soon. For starters, the long-term average annual gain for the S&P 500 is close to 10%, but we’ve now had double-digit gains in six of the past seven full years.
Therefore, the S&P 500 was recently trading at a rather steep price-to-earnings (P/E) ratio of 32. The last time it was this high was before it crashed in 2020. Similarly high levels occurred before other crashes, too.
And inflation has been rising over the past year or more, thanks in part to tariffs, the war with Iran, and even artificial intelligence (AI) and the data centers used to run it. That can lead the Federal Open Market Committee (FOMC) to hike interest rates, which tends to not be great for business or the stock market.
What to do
So what should you do? Well, it depends:
- As always, never keep any money in the stock market that you expect to need within five, if not 10, years. You don’t want to have to sell to generate cash after a big market drop.
- If you have a long investing period ahead, it’s often best to ride out any downturns. Most market pullbacks resolve within a year or two, though they could last longer.
- If you’re approaching retirement, you might move a chunk of your assets into less volatile investments, such as CDs, money market accounts, bonds, etc.
- If you’re very risk-averse, perhaps move some of your assets out of stocks.
Many of us might want to sell some holdings just to generate cash that can be deployed into bargain-priced stocks after a crash. If you do this, perhaps focus on your most overvalued or volatile holdings.
