2008’s stock and commodity market meltdown destroyed a lot of fortunes, although it also taught us a lot of lessons. We know that while market crashes don’t happen too often, they are not uncommon. We have already seen two since the year 2000, and while they are difficult to time, it is fair to say that the stock market will probably crash again in the next few years.
Some signs to look for include:
- Disparate economic data and stock market activity (e.g., a rising stock market versus a shrinking economy).
- Weakness in economically sensitive stocks like industrials and financials versus relative strength by defensive large-cap names.
- Too much leverage in the equity markets.
- A generally bullish consensus among Wall Street analysts.
To a certain extent, these four things describe the current environment, although not only are they not predictive, but we live in unprecedented times, considering the Federal Reserve’s near-zero percent interest rate policy.
Nevertheless I would be a little cautious, and one strategy that I think is worth considering is to look at the assets that outperformed in 2008 for portfolio ideas.