It might be the last thing you want to hear, but it’s the truth: A stock market crash is inevitable.
Since the March 23, 2020 bottom, investors have enjoyed a historically strong bounce-back rally — the widely followed S&P 500 (SNPINDEX:^GSPC) has gained an impressive 90%. But both history and valuation metrics unequivocally suggest that a big drop is upcoming for the stock market.
History is pretty clear that trouble lies ahead
For example, there have been one or two double-digit percentage declines within the three years following a bottom in each of the previous eight bear markets prior to the coronavirus crash (i.e., dating back to 1960). Although bull markets tend to last years, rebounds from a bear market are never this smooth. We’re nearly 15 months past the March 2020 bear-market bottom in the S&P 500 and have yet to see anything close to a double-digit correction.
To add to this point, data from market analytics firm Yardeni Research shows that there have been 38 double-digit declines in the S&P 500 over the past 71 years. That’s a crash or correction, on average, every 1.87 years. Though the market doesn’t adhere to averages, it does give a general sense of when to expect these hiccups.
On a valuation basis, the S&P 500’s Shiller price-to-earnings (P/E) ratio is a waving red flag. The S&P 500’s Shiller P/E — a measure of inflation-adjusted earnings over the previous 10 years — almost hit 38 earlier this week. That more than doubles its 151-year average, and it’s the highest level in nearly two decades. The previous four times the Shiller P/E surpassed and held above 30 during a bull market rally, the index subsequently declined by a minimum of 20%.
Make no mistake about it — a stock market crash is coming.
Every crash or correction is an opportunity for patient investors to make money
However, a crash is no reason to duck and cover. While history may signal trouble ahead, it also tells us that each and every double-digit decline has been a buying opportunity. Eventually, every big drop in the major indexes is erased by a bull-market rally. When the next crash does occur, the following five high-conviction stocks can be confidently bought hand over fist.
Cybersecurity is projected to be one of the safest double-digit growth trends this decade. No matter the size of the business or the state of the U.S./global economy, protecting enterprise and consumer data is paramount. This means cloud-based cybersecurity stock CrowdStrike Holdings (NASDAQ:CRWD) can thrive in any environment.
CrowdStrike’s success derives from its cloud-native Falcon security platform. Because it’s built in the cloud and relies on artificial intelligence, it’s growing smarter at identifying and responding to threats all the time. It’s currently overseeing 6 trillion events on a weekly basis, and it’s far more cost-effective at protecting data than on-premise solutions.
We can also look to the company’s income statements to see clear-cut evidence that businesses favor CrowdStrike’s cybersecurity platform. It’s been retaining 98% of its clients, has seen existing clients spend 23% to 47% more on a year-over-year basis for the past 12 quarters, and recently reported that 64% of its customers have purchased at least four cloud module subscriptions. Scaling with its customers is CrowdStrike’s ticket to big-time cash flow expansion.
Brand-name businesses can make patient investors a fortune, and social media giant Facebook (NASDAQ:FB) is the perfect example.
When the curtain closed on March, Facebook tallied 2.85 billion monthly active users (MAU) visiting its namesake site and an additional 600 million unique MAUs visiting WhatsApp or Instagram, which it also owns. All told, this equates to 44% of the global population interacting with its owned sites each month. There’s simply no social media platform businesses can go to get their message to a broader (or potentially targeted) audience, which is why Facebook ad-pricing power is so strong.
But here’s the kicker: Facebook hasn’t even put the pedal to the metal. Although it’s on track to generate more than $100 billion in advertising revenue in 2021, nearly all of these ad sales are coming from its namesake site and Instagram. WhatsApp and Facebook Messenger, which are two of the six most-visited social sites in the world,…