Is A Stock Market Crash Coming? Here's What The Data Suggests

For the past 17 months, investors have enjoyed a historic rally. Since bottoming out on March 23, 2020, the broad-based S&P 500 (SNPINDEX: ^GSPC) has doubled in value. While we've witnessed some healthy bounce-back rallies from a bear-market bottom throughout history, we've never seen the benchmark index double from its lows in such a short time frame.

But such rapid gains in the wake of such economic uncertainty also raise the question: Is a stock market crash coming?

Although no one knows with any certainty, we can turn to an abundance of data to get a better idea of what might lie ahead for the S&P 500 and your portfolio.

A confluence of data suggests a crash or steep correction is growing more likely

Perhaps the most concerning indicator that a significant decline might await the stock market can be found by closely examining the S&P 500's Shiller price-to-earnings ratio. The Shiller P/E takes into account inflation-adjusted earnings over the past 10 years.

On Monday, Aug. 16, the S&P 500's Shiller P/E hit a nearly two-decade high of 38.91. For some added context, the average Shiller P/E dating back 151 years is 16.84.

Understandably, the democratization of financial data with the advent of the internet has helped to expand earnings multiples considerably over the past two decades. Nevertheless, the previous four instances where the S&P 500's Shiller P/E surpassed and held above 30 haven't ended well. In each of these instances, the index subsequently lost at least 20% of its value.

Examining the way the S&P 500 bounces back from bear market bottoms is also telling. Excluding the coronavirus crash, there have been eight bear markets since the beginning of 1960. Every single one of these bear markets featured at least one pullback of 10% (or greater) within three years of reaching its bottom.

In fact, five of these eight bear markets endured two double-digit percentage pullbacks within three years of hitting a trough. The point being that bouncing back from a bear-market bottom rarely results in a straight line higher, as we've predominantly experienced over the past 17 months. Historical data would suggest that the market is due for some potentially significant downside.

A quick look at historic crash and correction data for the S&P 500 paints a similar picture. Since 1950, the S&P 500 has undergone 38 double-digit percentage declines, according to figures from market analytics company Yardeni Research. That's a crash or correction, on average, every 1.87 years. While it's important to note that the stock market doesn't adhere to averages, it's still worthwhile to observe the frequency by which the S&P 500 pulls back by 10% (or more).

In other words, crashes and steep corrections are a perfectly normal part of the investing cycle. Based on the above data, it shouldn't surprise investors if a stock market crash is coming.

But wait: There's another side to this story

Another side to this data needs to be told.

Although stock market crashes and corrections are common, historic data also very clearly shows there are advantages to staying the course as a long-term investor and buying great companies on any weakness.

For example, the investing landscape technically offers no guarantees. Yet each and every crash or correction in history has eventually been erased by a bull market rally. That means long-term investors in the S&P 500 would be 38-for-38 if they bought during a crash or correction, or simply held an S&P 500 tracking index since the beginning of 1950.

What's more, Crestmont Research examined the rolling 20-year returns of the S&P 500 between 1919 and 2020 (a 102-year period) and found that the total returns, including dividends, for any end-year in this stretch would have yielded investors a positive return. Only two of these 102 end years (1948 and 1949) produced an average annual total return of 5% or less. Meanwhile, more than 40 end years in this time frame yielded at least a 10% average annual total return.

Video: The Fed will crash the market if they increase interest rates: Opimas CEO (Yahoo! Finance)

Essentially, when you buy into the S&P 500 is far less important than how long you hold. If you held your position for at least 20 years between 1919 and 2020, your initial investment grew.

It also doesn't hurt that the S&P 500 is comprised of 500 of the largest companies in the world. Its components tend to be profitable, time-tested businesses that are able to take advantage of the disproportionately long period of time the U.S. And global economies spend expanding, relative to contracting.

Lastly, take note that while crashes and corrections occur often, they usually don't last very long. The average double-digit correction since 1950 has lasted 188 calendar days (about six months), whereas the average modern-era correction (i.E., since computers became mainstream on Wall Street in the mid-1980s) is only 155 calendar days (roughly five months). Comparatively, bull markets are measured in years.

Buying great companies and staying the course is a proven path to building wealth.

Three stocks to buy if a market crash does occur

Speaking of great companies, if a stock market crash does rear its head sometime in the foreseeable future, the following three stocks would be perfect for patient investors to add to their portfolios.

Visa

First, consider picking up shares of payment processor Visa (NYSE: V). It's a company that benefits immensely from the steady expansion of U.S. And global gross domestic product. Since periods of expansion last considerably longer than recessions, Visa is able to take advantage of increased spending from consumers and businesses.

It's also important to understand that Visa isn't a lender. It strictly sticks to its role as the leading provider of payment network services in the U.S. And globally. Since it doesn't lend, Visa won't have to set aside cash if credit card delinquencies rise during a contraction or recession. This is a big reason Visa's profit margin is consistently above 50%, and why it bounces back much faster than other financial service stocks.

Intuitive Surgical

A second no-brainer buy during a stock market crash is robotic-assisted surgical system developer Intuitive Surgical (NASDAQ: ISRG). Since we don't get to choose when we get sick or what ailment(s) we develop, there's steady demand for healthcare stocks offering drugs, devices, and operating systems.

What makes Intuitive Surgical so special is its dominance of the assisted surgical space and its growing operating margins. As for the former, none of its competitors even comes close to its installed base of 6,335 da Vinci surgical systems. Between the high cost of these systems ($500,000 to $2.5 million) and the hours of training given to surgeons, da Vinci buyers are likely to remain long-term clients.

When it comes to operating margins, Intuitive Surgical's are primed to expand over time. That's because selling instruments and accessories with each procedure, as well as servicing its robotic systems, generates juicier margins than actually selling the da Vinci surgical system. As its installed base grows, so will its operating margins.

Duke Energy

Lastly, investors can confidently buy shares of electric utility stock Duke Energy (NYSE: DUK) if volatility picks up and the broader market heads lower.

The beauty of utility stocks is the transparency of their cash flow and outlooks. This is to say that demand for electricity doesn't change much from one year to the next, which is what leads to predictable profits and market-topping dividend yields. In the case of Duke Energy, investors are pocketing a healthy 3.7% yield.

What truly makes Duke Energy an intriguing investment is the $58 billion to $60 billion the company is spending on new infrastructure projects between 2020 and 2024. The vast majority of this spending will be on renewable energy, which will lower the company's electric generation costs and lift its growth rate. As the U.S. Goes green to fight climate change, Duke's transition to cleaner forms of energy will benefit its shareholders.

Weakness In Bank Stocks Is A Warning For The Stock Market

(Photo by Robert Alexander)

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I actively cover eight bank stocks. This includes the four big banks considered “too big to fail:” Bank of America (BAC), Citigroup C (C), JPMorgan Chase JPM and Wells Fargo WFC .

The four big regional banks I follow are M&T Bank MTB , PNC Financial Services Group PNC , Truist Financial TFC and US Bancorp USB .

I am covering these stocks looking at their daily and weekly charts, and key levels from my proprietary analytics.

Scorecard for the major bank stocks

Global Market Consultants

Bank of America ($40.19) set its 52-week high of $43.49 on June 3. It then traded as low as $36.51 on July 19. It has been trading above a golden cross on its daily chart since November 20, 2020. This resulted in a buy signal at $26.81. After trading as high as $42.28 on August 12 the stock is just above its 50-day simple moving average at $39.90. The 200-day SMA is $36.13.

The weekly chart for BofA BAC is positive with the stock above its five-weekly modified moving average at $40.04. Its 200-week simple moving average, or reversion to the mean, is at $30.13. Its 12x3x3 weekly slow stochastic reading is rising at 46.03.

Strategy: Buy weakness to its annual, semiannual and quarterly value levels at $37.81, $35.13 and $34.32, respectively. Reduce holdings on strength to its monthly risky level at $46.11.

Citigroup ($69.84) set its 52-week high of $80.29 on June 2. It then traded as low as $64.36 on July 19. It has been trading above a golden cross on its daily chart since December 14, 2020. This resulted in a buy signal at $58.74. After trading as high as $74.64 on August 12 the stock is testing its 50-day simple moving average at $68.92. The 200-day SMA is $67.06.

The weekly chart for Citi is neutral with the stock below its five-weekly modified moving average at $70.43. Its 200-week simple moving average, or reversion to the mean, is at $65.25. This was tested during the week of July 23 as a buy signal. Its 12x3x3 weekly slow stochastic reading is rising at 33.85.

Strategy: Buy weakness to its quarterly value level at $54.68 and reduce holdings on strength to its annual risk level at $82.01. There is a semiannual pivot at $67.74.

JPMorgan Chase (JPM) ($154.28) set its 52-week high of $167.44 on June 2. It then traded as low as $145.71 on July 19. It has been trading above a golden cross on its daily chart since November 16, 2020. This resulted in a buy signal at $117.30. After trading as high as $162.37 on August 12 the stock is just below its 50-day simple moving average at $154.33. The 200-day SMA is $144.64.

The weekly chart for JPM is neutral with the stock below its five-weekly modified moving average at $155.49. Its 200-week simple moving average, or reversion to the mean, is at $116.92. Its 12x3x3 weekly slow stochastic reading is rising at 44.01.

Strategy: Buy weakness to its annual, semiannual and quarterly value levels at $149.69, $140.60 and $138.83, respectively. Reduce holdings on strength to its monthly risky level at $178.18.

Wells Fargo (WFC) ($47.25) set its 52-week high of $51.41 on August 13. It then traded as low as $46.83 on July 19. It has been trading above a golden cross on its daily chart since December 30, 2020. This resulted in a buy signal at $29.75. After trading as high as $51.41 on August 13 the stock is above its 50-day simple moving average at $45.69. The 200-day SMA is $38.54.

The weekly chart for WFC is positive with the stock above its five-weekly modified moving average at $46.71. Its 200-week simple moving average, or reversion to the mean, is at $44.80. Its 12x3x3 weekly slow stochastic reading is rising at 72.38.

Strategy: Buy weakness to its semiannual and quarterly value levels at $30.84 and $28.65, respectively. Reduce holdings on strength to its monthly and annual risky levels at $53.59 and $61.51.

The super-regional banks do not chart as well as the too big to fail banks.

M&T Bank ($134.66) set its 52-week high of $168.27 on May 18. It then traded as low as $128.46 on July 23. It traded above a golden cross on its daily chart between December 4, 2020, at $128.02 to August 16 when a death cross formed at $139.08. The stock is below its 50-day and 200-day simple moving averages at $141.08 and $143.15.

The weekly chart for MTB is negative with the stock below its five-weekly modified moving average at $139.76. It’s below the 200-week simple moving average, or reversion to the mean, at $151.63. Its 12x3x3 weekly slow stochastic reading is oversold at 19.56.

Strategy: Buy weakness to its quarterly value level at $95.87. Reduce holdings on strength to its monthly and annual risky levels at $171.00 and $181.11, respectively. Its semiannual pivot is $139.42.

PNC Financial Services Group ($184.34) set its 52-week high of $203.87 on May 10. It then traded as low as $176.43 on July 19. It’s been above a golden cross on its daily chart set at $126.74 on November 11, 2020. The stock is below its 50-day simple moving average at $187.08 but above its 200-day simple moving averages at $170.08.

The weekly chart for PNC is neutral with the stock below its five-weekly modified moving average at $187.02. It’s above the 200-week simple moving average, or reversion to the mean, at $140.56. Its 12x3x3 weekly slow stochastic reading is rising at 45.36.

Strategy: Buy weakness to its semiannual and quarterly value levels at $155.64 and $155.29, respectively. Reduce holdings on strength to its monthly risky level at $211.60. Its annual pivot is $186.11.

Truist Financial ($55.04) set its 52-week high of $62.69 on May 10. It then traded as low as $51.87 on July 19. It’s been above a golden cross on its daily chart set at $41.85 on October 29, 2020. Its below its 50-day simple moving average at $55.47 but above its 200-day simple moving averages at $54.56.

The weekly chart for TFC is neutral with the stock below its five-weekly modified moving average at $55.98. It’s above the 200-week simple moving average, or reversion to the mean, at $49.34. Its 12x3x3 weekly slow stochastic reading is rising at 35.58.

Strategy: Buy weakness to its semiannual and quarterly value levels at $51.54 and $47.18, respectively. Reduce holdings on strength to its annual and monthly risky levels at $61.16 and $63.94.

US Bancorp ($55.34) set its 52-week high of $62.47 on May 18. It then traded as low as $54.06 on June 18. It has been above a golden cross on its daily chart set at $43.31 on November 13, 2020. Its below its 50-day simple moving average at $56.77 but above its 200-day simple moving averages at $52.71.

The weekly chart for USB is neutral with the stock below its five-weekly modified moving average at $55.85. It’s above the 200-week simple moving average, or reversion to the mean, at $50.16. Its 12x3x3 weekly slow stochastic reading is rising at 33.54.

Strategy: Buy weakness to its semiannual and quarterly value levels at $46.58 and $44.84, respectively. Reduce holdings on strength to its annual and monthly risky levels at $63.87 and $64.11.

5 Things To Know Before The Stock Market Opens Friday

Here are the most important news, trends and analysis that investors need to start their trading day:

Stock futures lower as Wall Street is set for a losing week

Joaquin Duato to replace Alex Gorsky as J&J CEO

China approves a major data protection law

Tesla plans to build a humanoid robot prototype, says Elon Musk

NATO will try to speed up evacuations from Afghanistan, official says

1. Stock futures are lower as Wall Street is set for a losing week a view of a large building: A view of the New York Stock Exchange Building on Wall Street in Downtown Manhattan in New York City.

a view of a large building: A view of the New York Stock Exchange Building on Wall Street in Downtown Manhattan in New York City.

U.S. Stock futures were lower Friday, one day after the S&P 500 inched out a slight gain to sever a two-session losing skid. S&P 500 and Dow futures were down about 0.4%, while Nasdaq futures dipped about 0.25%. All three major indexes enter Friday in the red for the week. The 30-stock Dow is riding a three-day losing streak and on pace for its worst week since June. The Nasdaq, which eked out a 0.1% advance Thursday, is on track for its worst week since May. Among the factors weighing on Wall Street this week are concerns about a possible Federal Reserve tapering of its asset purchases and the trajectory of the economic recovery in the face of rising Covid cases. The yield on the benchmark 10-year Treasury note stood at 1.235% Friday morning, down nearly 1 basis point.

2. Joaquin Duato to replace Alex Gorsky as J&J CEO a man wearing a suit and tie looking at the camera: Joaquin Duato, executive vice president and worldwide chairman of pharmaceuticals at Johnson & Johnson on Tuesday, Jan. 31, 2017.

a man wearing a suit and tie looking at the camera: Joaquin Duato, executive vice president and worldwide chairman of pharmaceuticals at Johnson & Johnson on Tuesday, Jan. 31, 2017.

Joaquin Duato will replace Alex Gorsky as chief executive officer of Johnson & Johnson, beginning Jan. 3, the pharmaceutical giant announced Thursday. Shares of the Dow component were slightly lower in premarket trading Friday as investors processed the news. Duato, currently vice chairman of the executive committee, also will be elevated to J&J's board. Gorsky, chairman and CEO since 2012, will transition to executive chairman. Gorsky has led the company while it faced a series of legal troubles related to its talc-based baby powder and other products, as well as the opioid crisis.

3. China approves a major data protection law

China's legislature on Friday approved a major data protection law, according to state media, a development that follows Beijing's tougher regulatory approach to technology companies in recent weeks. While a final version of the Personal Information Protection Law has not been released, it is said to lay out stricter rules on how companies collect and store users' personal information. The law goes to effect Nov. 1, according to Reuters, and is likely to add to the compliance rules firms operating in the country need to follow.

Video: U.S. Stocks look to a flat open (CNBC)

U.S. Stocks look to a flat open

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Investors have adopted a more skeptical attitude to Chinese companies since a government crackdown on ride-hailing giant Didi Global and other industries intensified in early July. On Thursday, star money manager Cathie Wood told CNBC she believes those recent events, particularly involving the online education industry, will "sear our memories for a long time." She added, "That could happen to any industry."

4. Tesla plans to build a humanoid robot prototype, says Elon Musk a man standing in front of a curtain

Tesla CEO Elon Musk said Thursday the electric vehicle maker plans to build a humanoid robot, dubbed the Tesla Bot, that has a goal of eliminating "dangerous, repetitive and boring tasks." Musk, who made the announcement during Tesla's AI Day, said the company will "probably have a prototype next year that looks like this," while standing nearby an on-stage human actor who wore a white, robot-like bodysuit. Musk has been known to make predictions about forthcoming Tesla products or initiatives that do not end up materializing on his initial timeline, if at all. Shares of Tesla were higher by about 0.5% in Friday's premarket trading. At its AI Day, Tesla also rolled out plans for a custom chip to be used inside its data centers.

5. NATO will try to speed up evacuations from Afghanistan, official says a group of people standing around a plane: A handout photo obtained from Twitter via @Bw_Einsatz on August 17, 2021 shows evacuees from Afghanistan as they arrive in an Airbus A400 transport aircraft of the German Air Force Luftwaffe in Tashkent, Uzbekistan.

a group of people standing around a plane: A handout photo obtained from Twitter via @Bw_Einsatz on August 17, 2021 shows evacuees from Afghanistan as they arrive in an Airbus A400 transport aircraft of the German Air Force Luftwaffe in Tashkent, Uzbekistan.

© Provided by CNBC A handout photo obtained from Twitter via @Bw_Einsatz on August 17, 2021 shows evacuees from Afghanistan as they arrive in an Airbus A400 transport aircraft of the German Air Force Luftwaffe in Tashkent, Uzbekistan.

NATO plans to intensify its efforts to evacuate people from Kabul as the Taliban tighten their grip on Afghanistan's capital city, an official told Reuters on Friday. The pledge comes as the U.S. And other Western nations face criticism for how they've handled the process of getting desperate Afghans out of the country. According to the NATO official, more than 18,000 people have flown from Kabul since the Taliban seized the capital Sunday. In the past five days, the U.S. Has airlifted roughly 7,000 people out of Afghanistan, the Pentagon said Thursday. The Taliban, which swiftly captured back Afghanistan as the Biden administration followed through on its promise to pull all troops out of the nation, has in recent days used violence to quell protests across the country.

— Follow all the market action like a pro on CNBC Pro. Get the latest on the pandemic with CNBC's coronavirus coverage.

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