Donald Trump is unlikely to get his wish of a US stock market crash this year.
I refer to the former US President's comments last week that he hopes the market will crash in 2024, because if he is elected in November and takes office a year from now, he does not want to be another Herbert Hoover. Hoover was president when the stock market crashed in 1929.
The stock market has fallen in two of the last four presidential election years, so it's understandable why there's concern that 2024 could see a repeat. In 2008, in the middle of the global financial crisis, the S&P 500 SPX lost 38.5% for the year. In 2020, with the economy grinding to a halt due to the COVID-19 pandemic, the S&P 500 lost 34% in just over a month.
A collapse could happen at any time, of course, so a collapse this year cannot be ruled out. However, the odds of that happening this year are much lower than average. That's according to the latest State Street US Forecast from crash research conducted by Robin Greenwood, professor of banking and finance at Harvard Business School.
In this research, Greenwood and his colleagues found that it is possible to determine when there is a high probability of an accident occurring. In an interview, Greenwood said that “the odds of a collapse are low” at the moment, not just for the market as a whole but “across the board” for individual market sectors as well.
Greenwood's model is based on a number of factors, such as performance over the subsequent two-year period, volatility, stock turnover, IPO activity, and the price path over the subsequent two-year period. For example, he and his fellow researchers found that when an industry outperforms the market by 150 percentage points or more over a two-year period, there is an 80% chance that it will collapse—which they defined as a decline of at least 40%. Over the next two years. As you can see from the accompanying chart, State Street is reporting low crash probabilities for all sectors – in each case well below the average forecast crash probabilities of the past five years.
These odds don't mean stocks will have a great year in 2024. It's possible that a new bear market could start this year without the decline meeting researchers' definition of a crash.
However, what State Street takes away from Froth's forecast is that there are bigger things to worry about this year than a possible collapse.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to audit them. It can be reached at mark@hulbertatings.com
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