Most investors who lived through the 2009 market crash experienced it as a traumatic event. The question top of mind of many investors is whether a 2009 type market crash is coming as stock markets are trading at all-time highs. In other words, is this 2007 again?
The short answer: no, a market crash like the one in 2008 or in 2009 is not coming anytime soon. We believe this based on the leading stock market indicator: 10-year yields.
Note, this does not imply that stock markets will not correct, nor does it mean that a flash crash will not occur or that a long-term bear market could not start.
Our point is that a market crash like the one in 2008 and 2009 will not happen anytime soon.
That is an important insight for several reasons.
- First, a market crash like the one in 2008 and 2009 implies literally all stocks are collapsing, literally all. While during a correction or bear market, there are always specific stock market segments that could hold up well.
- Second, such an event has a very strong impact on other markets, something we call ‘intermarket dynamics‘.
- Third, anticipating such an event is the best thing an investor can do, so raising cash in time is the way to go in such a scenario; however, if such an event does not take place, the accumulated cash will be ineffective as it would yield nothing.
Why do we believe that this is not 2007, i.e. the market top right before the crash?
The chart in this article, representing 10-year yields, the leading indicator for stock markets, reached an extreme level in 2007, as indicated with the purple arrow. It was a level of extreme risk-taking as yields went outside their long term channel. Today, we do not see such a situation, as yields are somewhere in the middle of the very long term channel.
Whether a correction will start anytime soon is a totally different question. This article only examines the question whether we are in a stock market peak similar to 2007, with a stock market crash coming, and the answer is “no, that is not likely to be the case.”
