Is a US Stock Market Crash Coming in 2020?

US stock markets might have the best year since 1997 if the current momentum sustains. After the 2019 rally, many analysts predict a crash for 2020.

Mohit Oberoi, CFA - Author

Sep. 4 2020, Updated 6:52 a.m. ET

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  • US stock markets might have the best year since 1997 if the current momentum sustains. That said, after the 2019 rally many analysts are predicting a stock market crash for 2020.
  • To be sure, economists have been predicting a market crash and a recession for most of 2019 as well. As it turned out, the Dow Jones Index (DIA) and the S&P 500 (SPY) rose sharply this year to record highs. After being terribly wrong in 2019, will market crash proponents have something to cheer in 2020? We’ll explore that in this article.
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Recession pundits have been wrong so far

Many economists expected a stock market crash in 2019. To be sure, recession pundits have forecast a recession many times over the last decade. Still, in the hangover of the 2008 market meltdown, some economists saw a recession amid the European debt crisis in 2010.

In 2013, economists said that the taper tantrum might lead us to a recession. Then came 2015 and concerns over China’s slowdown were seen as a precursor to a recession. Economists also cited Brexit as a possible recession trigger. 

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US stock market crash

While there are some permabears who perennially predict a recession and a market crash, in the last two years the chorus has become large. For instance, many economists expected that the US-China trade would lead us into a global recession. Economists also cited US yield curve inversion as the ultimate sign of an impending recession.

However, while the US, as well as global economic growth, slowed down this year, it still does not feel like a recession. Read The 2019 US Stock Market Crash that Never Came! to analyze why bears lost the plot in 2019. 

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Will the US stock market crash in 2020?

As things turned out, bears lost the plot this year. Forget a market crash, US stock markets might have the best year in more than two decades. With record highs in the stock markets, some analysts now predict a market crash for 2020.

Speaking with CNBC, Edward Yardeni said “[A] 10% to 20% [correction] would be quite possible if this market gets to 3,500 well ahead of my schedule.” Incidentally, Yardeni is not exactly in the permabear camp. He has a 2020 end S&P 500 target of 3,500 higher than the consensus estimate. Read S&P 500 at Record Highs: Not Much Upside in 2020 to see what some of the other analysts are projecting for S&P 500. 

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Some say yes!

Yardeni is not the only one predicting a stock market crash. According to CNBC, Jack Ablin of Cresset Capital expects US stock markets to crash more than 15% early next year. According to Ablin, “valuations are pretty stretched.”

To be sure, stock market valuations are not cheap. S&P 500’s forward PE multiple is higher than the five-year and ten-year average. However, next year’s earnings growth is expected to be higher than the ten-year average according to a FactSet report.

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According to MarketWatch, Joe Davis of Vanguard sees a 50% chance of a market correction next year. Typically, a market fall of 10% is just a correction. Also, Guggenheim Partners’ Scott Minerd is amongst those who feel that asset prices have run ahead of fundamentals. 

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Minerd said, “while the Fed has prolonged the expansion, the reality is that it is also the start of silly season in risk assets. By heeding the lessons of the past, we continue to position defensively so that we can preserve capital and be prepared to take advantage of opportunities when asset prices inevitably reset.”

Investors expect a stock market crash next year, too

It is not that only Wall Street analysts expect a stock market crash next year. A UBS survey of high net worth clients showed that the majority expects a stock market crash next year. Read Market Crash Imminent, Say Super Rich: Time to Panic? for more analysis. That said, of late, some fund managers are turning bullish on equities as a Bank of America survey showed.

In my view, the stock markets’ 2020 outlook looks evenly balanced. As things stand today, the momentum is strong. However, fundamentally valuations appear stretched. There are plenty of geopolitical risks on the table in 2020. While there is optimism over global growth, a large part of that already seems baked in stock prices. As for a stock market crash in 2020, one cannot ever rule out the possibility. But then, stock market investing was never for the faint-hearted! 


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