The Motley Fool

3 Signs a Market Crash Is About to Come

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People have been waiting for another market crash ever since the market recovery momentum slowed down. The S&P/TSX Composite Index recovered by almost 42% by June. From there on, in the next four-and-a-half months, the market has only recovered in single digits. But a slow recovery is still happening, and by itself, it’s not a sign of a market crash.

In fact, a slow recovery seems more legit. The early phase of recovery, when the tech sector grew too rapidly after the market crash and led the market to recovery, seemed too good to last. But it did, and when the market didn’t crash then, people started to expect that the slow recovery market will eventually start moving in the wrong direction, initiating another market crash.

Three signs might be endorsing that fact.

The stock market and the underlying economy

The stock market grew too fast to be in line with the underlying economy. The gap between the two was relatively narrow in Canada, but across the border, the difference was too vast, even before the crash, and it has only gotten wider after the March crash. This was one reason why the Buffett Indicator flashed a warning recently, indicating that the market was growing too fast for the GDP.

Political instability

That’s not a clear sign, and there is no universal interpretation (or even surety) that it will be the significant driver of another market crash, but it might still be a sign. Biden’s win might spell some trouble for the energy industry, and since the U.S. and Canada both rely pretty heavily on oil, which is already pretty weak, some untimely announcements and decisions can snowball into a huge economic mess.

Warren Buffett’s actions

Warren Buffett’s recent actions, including his decision to buy gold and sell a major restaurant business, can be perceived as a strong indicator that another market crash is coming. That might also be the reason why Buffett hasn’t actively bought in the wake of the recent crash, despite a huge cash pile at his disposal.

If another market crash is coming, a relatively less depressing way to prepare is to think about what to buy. PyroGenesis Canada (TSXV:PYR) is one of the stocks you may want to look into. This Montreal-based company with a market cap of $558 million is a global leader in the industrial plasma processes. The company has a wide variety of cutting-edge plasma products. But even that doesn’t explain the rapid growth the company showed after the last market crash.

The stock fell almost 50% during the market crash. But when it recovered, it grew far more than its pre-pandemic high. This little stock grew almost 2,800% in about four months. Even now, when it has fallen from its post-crash highest valuation, it’s still 600% higher than its start-of-the-year valuation.

Foolish takeaway

Another market crash is highly likely. It might not be as sharp as the last one nor as deep. It can be significantly more protracted, and that might make the eventual recovery even slower. This would give you more time to pick up good stocks but would delay the overall recovery of your investment portfolio. But there is also a possibility that the vaccine-driven optimism will keep the market from falling.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Adam Othman has no position in any of the stocks mentioned.

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