With major equity benchmarks flirting with all-time highs, thoughts of what happens when the stock market crashes are likely far from many investors’ minds.
Not to sound alarm bells, but perhaps such thoughts shouldn’t be so far off. At a minimum, those concerns are worth acknowledging at a time when 30-year Treasury yields are residing around the highest levels since right before the global financial crisis.
Advisors know that without the benefit of a crystal ball, no one knows exactly what happens when the stock market crashes aside from the part where risk assets are punished. There are usually declines in employment, sour consumer sentiment and other macroeconomic pressures, but each bear market is different so advance preparation can be difficult.
One of the ways to ease that burden, and it’s relevant regardless of market environment, is to be selective. It’s not a bullet proof strategy, but it’s one that allays concern and wonderment about what happens when the stock market crashes.
Selectivity Is Always Fashionable
It might not feel like it, but selectivity matters here and now because there is an element – a strong one – to this year’s equity market upside.
“A key reason is earnings. Corporate profits have been strong enough to help support rising stock prices and limit further multiple expansion, even though valuations remain elevated,” observes Morgan Stanley Wealth Management Chief Investment Officer Lisa Shalett. “The recent market pause also appears to have cooled some fast-rising trades in overheated parts of technology and semiconductors.”
Tech cooling without entering a bear market is pivotal in extending the lifespan of the current rally because given the current state of affairs, those wondering what happens when the stock market crashes may not have to look any further than tech. That’s not to say a 2000-style bubble is afoot.
Ample scrutiny is being applied to artificial intelligence (AI) financing schemes and hyperscaler expenditures. In some cases, that’s exerted downward pressure on select names, but some experts believe the scrutiny is a positive.
“That scrutiny is a good thing. It helps separate companies with durable advantages from those simply riding the broader AI theme, especially as investors focus more on AI’s economics, since every query consumes costly computing power,” adds Shallet. “The next phase is likely to reward efficiency, from smarter AI models to more flexible data centers and a wider mix of chips.”
The Rate Conundrum
It’s not guaranteed, but one for those wondering what happens when the stock market crashes, one of the predictable responses by the Federal Reserve is to lower interest rates.
Yes, lower rates would be nice, but there’s occurring right now without that benefit. With rates uncomfortably high for some advisors and investors and new Fed Chairman Kevin Warsh more “covert” than market participants are accustomed, there’s burning desire in some circles to lower rates over the near-term. But believe it or not, there’s value in today’s high interest rates.
“Today’s higher rates may be uncomfortable, but they can play a healthy role: They reward savers and fixed income investors,” concludes Shallet. “They can also encourage more disciplined borrowing and spending by steering money away from weaker or speculative projects and toward stronger ones with clearer returns, helping allocate capital more efficiently across the economy. This, in turn, may help reduce the odds that the AI boom turns into a full-blown asset bubble.”
