It’s not a matter of if but when the next market crash will hit. There’s normally a correction when the markets overheat and here are just a few examples of how outlandish things are right now. Lightspeed provides merchants with cloud-based point of sale systems that are easy to integrate with a business’s existing operations.
Two sectors that make up the bulk of its customers are hospitality and restaurants, two areas that the COVID-19 pandemic has had a particularly devastating impact on. And yet, the stock has soared 120% in the past year, dwarfing the TSX and its 2% gains despite those concerns.
The economy faces some tough times ahead even after the pandemic is over with businesses shutting down and many workers having no jobs to go back to. That’s bad news for financial institutions as it means the risk of default is high for people who have mortgages and loans to pay back. And yet, Royal Bank of Canada (TSX:RY)(NYSE:RY), the top bank stock on the TSX, is back to where it was before March’s market crash last year and has fully recovered as if nothing happened and things are normal again.
Businesses that rely on foot traffic, particularly movie theatres, have the longest roads to recovery before they’ll be operating anywhere near their pre-pandemic levels. But that didn’t stop investors from jumping the gun on Cineplex stock after Biden’s election victory in the U.S.; the stock has soared 120% in just three months as if a recovery were imminent.
It’s not hard to find these types of examples because of how overpriced things are in the markets right now. Emotions are driving investors to make some decisions they could end up regretting very soon.
Could a market crash be right around the corner?
Last year’s market crash was extreme and sudden, but it doesn’t always have to play out that way. In 2018, the markets fell over a cliff during the last quarter of the year in a more gradual decline:
The year before that, in 2017, the markets started falling around April:
There’s typically been some sort of correction in each of the past few years either at the end of the year or during the early stages of it. And with valuations as high as they are today, the time is certainly ripe for another market crash.
Whether a poor earnings season over the next few weeks triggers a selloff, reminders of last year’s crash strike fear into investors or climbing COVID-19 case numbers push investors to hit the sell button, once the markets start tumbling things can quickly snowball. All of those factors could play a role in the next market crash, which is why it wouldn’t be surprising if sometime before March will see a selloff in the markets.
Investors should always be prepared
Regardless of whether you think a crash will happen tomorrow, a month from now, or a year from now, you can protect your portfolio by sticking with safe investments that aren’t egregiously overpriced. Buying stocks with low price-to-earnings multiples with strong, diverse businesses can be a way to ensure that at least even if there’s a market crash, your investments will be in good shape to recover.
Hopping on the bandwagon and buying bitcoin or other speculative investments just because they keep going up, however, can put your portfolio in a very vulnerable position.
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Fool contributor David Jagielski has no position in any of the stocks mentioned. The Motley Fool owns shares of Lightspeed POS Inc.