Could the stock market really crash 40%?

Could the stock market really crash 40%?

Whether you’ve invested in ASX stocks or international stocks, this is a frightening statistic.

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

The Fed’s series of 2022 rate hikes have already pushed the NASDAQ-100 (NASDAQ:NDX) down 28% this calendar year. Along with rate increases from the RBA, the S&P/ASX 200 Index (ASX:XJO) has also been sent down 11% year-over-year.

So, is the stock market crash still looming?

Dr. Doom warns of 40% stock market fall

Nouriel Roubini, CEO of Roubini Macro Associates, long known as Dr. Doom, is known for his penchant for recession forecasts.

While he hasn’t made all those predictions right, he hammered the nail well before the 2008 GFC came out in full.

Now, as Bloomberg reports, Roubini sees a “long and ugly” global downturn by the end of this year and lasting until 2023.

He also believes it will cause the stock market to crash, with “a real hard landing” leading to a potential 40% drop in the S&P 500 Index (SP: .INX). A stock market crash that will likely appear on the ASX.

“Even in a plain vanilla bearish, the S&P 500 could drop as much as 30%,” Roubini said.

Of particular concern are the mountains of debt held by governments and corporations. Loans that are far more expensive to service will become more expensive as interest rates exceed their recent historical lows.

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According to Roubini (quoted by Bloomberg):

Many zombie institutions, zombie houses, corporates, banks, shadow banks and zombie countries are about to die. So, we will see who is swimming naked.

Roubini also cited a number of supply-side issues that are likely to continue upward pressure on prices. These include Russia’s invasion of Ukraine, China’s COVID-zero lockdown policies as well as slashing production in the world’s most populous country.

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 incentives to survive a stock market crash will be left out. “If you do a fiscal stimulus, you are pushing up 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 to this, “You should be light on equity and have more cash.”

Of course, not everyone agrees with this.

Take a long term investment approach and sleep well

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

Writing in a tech stock yesterday, Phillips said that “worrying about volatility or ‘watching’ the markets are not things it does.

“The truth is, I don’t remember ever being woken up by the stock market,” he said. “And I invested during the dot.com boom and bust. I invested during GFC. And I invested during COVID. [stock market] crash.”

While Phillips admits that these were not easy times, the ASX and international stock portfolios were often deeply in the red.

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

“The lesson of history on the stock market is that a compounded profit of about 9% per year has been the norm,” he said. “This includes all three crashes – dot.com, GFC and COVID.”

Phillips said investors should certainly expect the same volatility in the market as before. But he added, “Investing patiently – saving, adding and waiting – has been an exceptional way to build seriously impressive long-term wealth.”

Taking a multi-decade investment horizon helps to have some perspective on any potential pending stock market crashes.

In doing so, Phillips said, “it means that whatever happens today, tomorrow, this year or next year is all irrelevant”.

“I hope that in 2052, we will look back in 2022 and wish we all invest more money today,” he said.

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