What’s the next stock market crash prediction?
How do you trade it with forex?
To answer those questions, you need to understand the stock market crashes of the past. If you don’t know history, then how can you predict the future?
There have been many market crashes throughout history. In fact, you can expect at least one crash per decade. Even though each crash is for a different reason, all crashes feel the same. There’s terror in the air and many people sell out of fear. This causes a minor crash (~20%-plus) to turn into a major one (~40%-plus).
The good news: If you learn from history’s most famous crashes, you will be better prepared to predict and trade future stock market crashes using forex. When crashes come along, prepared forex traders can make millions. That might sound silly. But professional forex traders tend to make the most money in a bear market. So it’s worthwhile reading up on a bit of history (i.e. below) to answer the question: What’s the next stock market crash prediction?
The tulip bubble
To start, the ‘tulip bubble’ is considered the first major recorded crash in history.
In the 17th century, the value of tulips inflated to shocking prices. At one point, a single tulip cost about six years’ worth of salary for the average person!
Speculation was to blame.
Initially, when tulips arrived from the Ottoman Empire in the 1500s, they soon became a symbol of affluence and wealth. The middle class demanded tulips in their gardens. Following so much demand, tulips soon listed on the Amsterdam Stock Exchange.
The Amsterdam Stock Exchange increased their popularity.
Prices kept on going up, with traders borrowing money to speculate on tulips until 1637. With prices inflated beyond reasonable levels, leveraged traders were caught with their pants down. When prices started to fall, leveraged traders sold quickly to pay their loans.
The tulip bubble popped.
Prices crashed 90% in three months!
Few people would have expected a crash by that magnitude. Times were good before the crash and a lot of people were making money. But there have been numerous 90% crashes throughout history (the most recent being cryptocurrency from 2017-2019) following people making a lot of money. So, even though the tulip bubble happened more than three centuries ago, you shouldn’t discount it. Remembering the tulip bubble’s history helps answer the question: What’s the next stock market crash prediction?
The stock market crash of 1929
Before we answer the question – what’s the next stock market crash prediction? – let’s go back to 1929.
The 1929 stock market crash is the most famous of all time.
The ‘Roaring Twenties’ were fuelled by the culmination of the First World War and the invention of the automobile. Massive social and economic growth materialised. People could get jobs easily and stock speculation was rampant until October 24 1929.
Share prices opened 11% lower that day.
Fortunately, for some, prices bounced back into the end of the week. But the rally was short–lived.
Markets corrected 13% on Monday.
People started to panic and prices fell another 12% the next day. The stock market crashed by 50% into October 29, before doubling into early 1930. The 1929 stock market crash was caused by excessive speculation and leverage, as well as a struggling agricultural sector with high unemployment.
There was mass unemployment, bank collapses, and long soup lines in the streets.
But there’s more to the story, which few people know.
During the panic, then US Treasury Secretary Andrew Mellon said, ‘This market crash will end when gentlemen prefer bonds.’
He was right for a few months.
After the stock market doubled into early 1930, sovereign debt (government bonds) defaults erupted from Europe to South America until 1932. The bond market crash triggered the Great Depression. Hundreds of banks collapsed around the world, thousands of businesses went bankrupt, and there was another 50% stock market crash. The bond market crash is pretty much deleted from history, so few people know that it was the main cause of the stock market crash and the Great Depression.
The stock market crashed by 90% from 1929-32, purely because of the sovereign debt (government bonds) defaults.
‘Gentlemen’ who owned ‘safe’ government bonds lost everything.
Nothing was left unscathed, except cash and gold.
Returning to the question – what’s the next stock market crash prediction? – is there another major sovereign debt crisis looming? US, German, Japanese and UK bond yields are at historical lows at the moment, as are lots of other nations’. Put simply, government bonds have been in a multi-decade raging bull market. World debt is at an all-time high and, right now, the global economy isn’t growing. That’s a huge red flag. If there’s another major bond market crash in the future, where developed nations (i.e. Italy, Germany, Japan, etc.) default on their bonds, it would be catastrophic and likely lead to another Great Depression…and a major stock market crash.
This time it didn’t trigger any bond market defaults. The European Central Bank stepped up and provided support, among other things like governments implementing fiscal austerity.
But will we be so lucky next time?
In fact, will another bond market crisis even happen? Think about it. Governments and central banks have the means to print money (quantitative easing) these days, unlike during the Great Depression. Back then, money was physical and you could swap your cash for gold. So, therefore, we need to keep learning from other major past stock market crashes to answer the question: what’s the next stock market crash prediction?
The 1987 stock market crash
The next major crash that everyone talks about is 1987.
1987 was the largest daily crash on record.
The US Dow Jones Industrials Index crashed by 40% on October 19 1987. Stock exchanges from Hong Kong to Australia and London also crashed. Some say there were no warning signs. But history shows that’s incorrect.
Remember, as discussed in the history of forex lesson, we know the 1985 Plaza Accord contributed to the 1987 stock market crash. The Japanese bought about one-third of the US national debt. That pushed the US dollar up against the yen by 50%, which made trade more expensive for other countries. For example, imagine your local currency falling by 50% against the US dollar and trying to buy US dollar goods or services.
It would be double the cost!
After the 1985 Plaza Accord meeting, the G-5 issued a statement encouraging the appreciation of non-US dollar currencies. US regulators thought the dollar was too high and wanted it to fall.
What do you think the Japanese did after the meeting?
Remember, they owned one-third of the US national debt, meaning a large part of their wealth was held in US dollars.
If you owned a lot of wealth in a currency and the plan was to devalue that currency, what would you do?
Sell that currency.
The Japanese sold what they owned in US dollars to avoid currency losses in US dollars.
The G-5 statement sent the US dollar crashing by 40% into 1987.
When the dollar was declining into 1987, politicians were becoming worried it was falling by too much. So they raised US interest rates to attract capital into the US dollar (i.e. regulators hoped that traders would buy the US dollar and invest in US debt with high interest rates).
It sounds crazy…
But politicians don’t know what they are doing.
The 1987 stock market crash (what few people know)
At the same time, while interest rates were rising, the US House of Representatives Ways and Means Committee introduced a tax bill on October 13 1987. The tax bill limited interest deductions used for leveraged corporate takeovers as tax write-offs.
Prior to this event, institutional investors had feared a crash was coming due to strong speculation in the market.
The stock market had risen for 4.5 years.
Institutional investors bought ‘portfolio insurance’ on their stock positions all year. So if the stock market fell by a certain amount, the ‘portfolio insurance’ would hedge their portfolios and offset any losses in their stocks. Portfolio insurance was essentially betting that prices will fall (i.e. short selling). If the market started to fall by more than their ‘hedge’ positions, they would buy more portfolio insurance to offset losses.
It was the perfect storm.
The introduction of the tax bill triggered a sharp selloff in leveraged takeover stocks. The tax bill limited interest deductions, which made future earnings less attractive for leveraged takeover stocks. (Don’t worry about the specifics here. Just realise that leveraged takeover stocks were less attractive after the bill and traders started selling them.)
As leveraged takeover stock prices kept falling, liquidity was lacking because nobody wanted to buy the stocks.
More importantly, the takeover stocks were bought with borrowed money (leverage) – hence their name ‘leveraged takeover stocks’. If this story reminds you of what is free margin in forex, you would be right. This is a real example of the lesson.
Traders ‘borrowed’ money to buy takeover stocks (i.e. leverage) and they couldn’t sell them to cover margin calls.
Margin calls were piling up all week.
Over the weekend, traders had time to digest the problems in the market.
When ‘Black Monday’ rolled around on October 19 1987, traders sold what they could to meet margin calls for leveraged takeover stocks at any price.
The portfolio insurance players joined in…
When the stock market fell further, portfolio insurance players hammered the market, causing the crash by buying portfolio insurance (i.e. short selling stock to protect their losses).
Fortunately, as hedge funds and traders didn’t over leverage themselves, the margin calls were minimal on leveraged takeover stocks. The portfolio insurance players also kept their calm and didn’t unload (sell) their leveraged buy (long) positions.
So the market recovered quickly.
Indeed, 1987 was the largest daily crash on record…
Many people fear another 1987 could arrive one day soon.
Nowadays, regulators use ‘circuit breakers’ to stop the stock market crashing by more than 5% in one day. But you should look out for any sign of history repeating in the future. For example, if regulators release a statement encouraging the appreciation of non-dollar currencies, you will know what to do!
Let’s turn to the dotcom bubble…
The dotcom bubble
Many analysts point to the excessive stock valuations of the dotcom bubble and say that they’re even higher today.
The dotcom bubble occurred in the late 90s.
With the increasing growth and popularity of the internet, everyone wanted to own tech companies.
Lots of capital was invested in unprofitable companies. In many cases, the companies didn’t even have any sales!
The most famous company was Pets.com ― an early–day version of Amazon. Although it had a solid business plan, selling thousands of products online, people didn’t trust the internet at the time.
People chose to buy goods in-store and didn’t want to wait for delivery.
Pets.com stood out due to its sock puppet mascot and catchy slogan. It opened its ‘doors’ in 1998 and listed on the NASDAQ, raising $82.5 million in early 2000. But, unfortunately, the company went bankrupt nine months later!
The dotcom bubble was one of the largest modern-day crashes in history. The NASDAQ crashed roughly 80% and took more than 15 years to recover.
The dotcom bubble was one of a kind.
Unlike the dotcom bubble of the 90s, when companies weren’t making any money, the leading tech stocks are making bucket loads of cash today (i.e. Apple, Google, Facebook, etc.).
That doesn’t mean there won’t be another 80% crash on the NASDAQ in the future.
Perhaps when the most popular tech companies start to see slower revenue growth, or new competition comes along, they too will experience an 80% crash one day. But with the internet still growing rapidly and no sign of new competition for the major tech companies, we could be waiting a while. That said, let’s return to the question: what’s the next stock market crash prediction?
The next stock market crash prediction could be anything.
But the next stock market crash won’t be the same as the last…
The coronavirus crash (2020)
In 2020, people feared a repeat of the 2008 global financial crisis.
Back then, banks were engaging in risky lending (high-risk mortgages) due to deregulation of the financial system. The party came to an end and the property market crashed. Some of the world’s largest banks went bankrupt and the US stock market crashed by 50%. Unfortunately, fearing another Great Depression, global central banks injected trillions of dollars into the financial system. This caused the stock market to rebound to new highs.
In short, central banks issued more debt to solve a debt crisis. The problems of 2008 weren’t solved, which is why people feared a repeat of the 2008 GFC.
I knew that we couldn’t get an exact repeat of 2008 ― every future crash is different to the last.
Look at the last 30 years.
I think, since the problems of 2008 were artificially patched over with debt, it was more likely there would be an even bigger debt crisis down the road. But heading into 2020, I was concerned about the corporate debt market. Corporate debt had doubled since 2008. US corporations had been borrowing money to buy back stock since 2008. At the same time, corporate earnings were starting to slow and some corporations were struggling to repay debt.
But everything changed with coronavirus.
Few people saw it coming.
The coronavirus crash was unlike any other before it. It was caused by economic reasons ― not financial. The coronavirus crash was produced by a government–enforced lockdown to prevent the virus from spreading. It was also the fastest crash in history, with the market dropping roughly 40% in two months. As the market fell rapidly, central banks came to the rescue and, once again, pumped trillions of dollars of liquidity into economies to prop up the stock market, just like they did following the 2008 GFC. This time around, they pumped trillions of dollars into the corporate debt market as well, preventing outright bankruptcies of some of the largest companies in the world (i.e. airlines, automobile stocks, etc.).
In short, central banks chose to pump more debt into the markets to calm the stock market.
Today, as at the time of this post, the stock market is trading around record highs…
Remarkable market crashes
There are lots more crashes to learn from in history:
- South Sea Bubble (1720)
- Panic of 1873 (1873)
- Asian financial crisis (1997)
- Global financial crisis (2008)
- Cryptocurrency crash (2017)
The list goes on…
But, as with every past market crash, they all follow the same process:
Your ‘Start With Forex’ takeaway: Next Stock Market Crash Prediction?
The question is: what’s my next stock market crash prediction?
You won’t like my answer.
It could be anything.
If you’re constantly looking for the next stock market crash prediction, you will miss loads of opportunities along the way. My recommendation is simple: don’t worry about the future. If you learn how to trade forex or stocks (like you’re doing in this course for free), you won’t worry about the next crash. Instead you will always be looking for the next opportunity. When the stock market next crashes, you will be looking for forex trading opportunities to make bucket loads of cash.
I said earlier that when crashes come along, the best forex traders can make millions.
That might sound silly.
But there’s a reason why professional traders tend to make the most money in a bear market. They’re focused and prepared.
Elite forex traders keep their calm and only have to trade in one direction ― on the short side.
Trading a crash isn’t rocket science.
Most currencies fall against the US dollar, especially in crashes caused for financial reasons. Remember, the US dollar is the world reserve currency, so people flock to ‘safety’. That’s happened during every financial crash since the Second World War. Typically, emerging market currencies suffer the most during the crash, so it pays to short emerging currencies.
Retail investors tend to lose their shirts during a crash, since they don’t know how to trade a crash. They can’t bring themselves to sell for a small loss and only sell when the loss gets too big.
Professional forex traders know when they’re wrong, prior to even entering a trade. They don’t worry about losing money and sell if the trade doesn’t work out.
Professional traders have ice in their veins.
Remember, there’s a staggering amount of debt in the world and the global economy is very weak due to the coronavirus lockdowns. So the next financial crash will be devastating. Central banks won’t be able to hold up the market forever. Yes, you can worry. But don’t fear the next stock market crash. Instead, you should stay on your toes and be prepared to trade it. If you’re in the right stocks or forex pairs, you will be laughing your way to the bank. So stop researching what’s the next stock market crash prediction and take a step back. Prepare yourself to profit when the next major stock market crash comes.
Trust us. If you pay attention, you will know if there’s something major in the air.
The bottom line: always trade the trade!
I hope you are becoming a more confident forex trader. The difference between forex traders who make it and those who don’t is risk management. So pay close attention to the next lesson.
If you’re ready to discover the secrets to becoming a successful forex trader, click here.
To your trading success,
Start With Forex
The Start With Forex Newsletter
Sign Up For Our Exclusive Email List: You Will Receive Trade Ideas And Advanced Course Material From Professional FX Traders Straight To Your Inbox.