Is the Noise About a Potential Stock Market Crash Valid?

Unless you have been living on a desert island, you would know that we are confronted with the doom and gloom messages of an impending stock market crash almost every day. I typed in the words ‘stock market’ in a YouTube search and the first five videos were all about the impending doom surrounding the stock market. Yet none of these videos were aimed at helping the viewer understand what to do in the event the stock market does pull back or crash.

Is all advice about a stock market crash good advice?

The other big issue that the world seems to be focused on is AI with many asking questions or looking for solutions from ChatGPT. I did what I suspect many are already doing, which is to ask Chat GPT to write a blog post on the three things I could do to avoid a stock market crash. The output was seriously alarming, as none of what it suggested was good information or advice on how to manage or avoid a crash.

What were the three things ChatGPT suggested I do? Firstly, it advised me to diversify my portfolio and shared the old adage of don't put all your eggs in one basket. If the stock market crashes, no amount of diversification is going to help you unless you move your money to cash or real estate before the crash starts. Unfortunately, this is not how investors think, particularly as the stock market is generally overly bullish before a crash starts and investors are loath to exit as they are making good returns.

It then advised me to regularly rebalance my portfolio to avoid over exposure to one asset, but this only increases your costs and risk. I am against rebalancing in a bull market but to suggest you do it in a bear market or a crash left me a little perplexed. Lastly and possibly the best bit of advice was to adopt a long-term perspective, but it also included a tip to dollar cost average, which in a stock market crash is the worst thing you can do for your portfolio.

No one knows when a crash will occur with a high degree of accuracy. Given this, it pays to be a boy scout and get prepared, as it will allow you to manage your stocks in the event the market does fall heavily. No one seems worried when the stock market is rising but irrespective of the direction of the market, it’s important to always have an exit strategy in the event your stocks fall. This is very simple to implement using a stop loss as it minimises your downside risk.

While it is inevitable that the stock market will crash again, we don’t know when this will occur. If you’re concerned right now, that means you need to plan because if something does happen, you know exactly what to do and how to react.

What were the best and worst performing sectors last week?

The best performing sectors included Consumer Discretionary up 1.78 per cent followed by Financials up 0.05 per cent and Real Estate, which was flat for the week. The worst performing sectors included Healthcare down 2.73 per cent followed by Consumer Staples down 2.53 per cent and Utilities down 2.25 per cent.

The best performing stocks in the ASX top 100 included Altium up 29.5 per cent this week after reporting strong earnings and revenue growth for FY 2023. This was followed by IDP education up 15.06 per cent and Qube Holdings up 11.03 per cent. The worst performing stocks included Alumina down 15.79 per cent followed by Iluka Resources down 14.78 per cent and Wisetech Global down 14.68 per cent.

What's next for the Australian stock market?

Over the past 22 trading days from 27 July to last Friday’s low, the Australian stock market has fallen almost 5 per cent and is looking a little bearish. As I have previously mentioned, this year has been a constant battle between the bulls and bears and last week it seems like the bears are still in control although they are struggling to push the market down. Right now, momentum is around 50 per cent slower than the prior move up.

Usually, the market moves down faster than it rises, but this is not the case at present, which explains in part why I am not a subscriber to a stock market crash. To put it bluntly, I do not believe our market can or will crash, as we know the All Ordinaries Index has been trading sideways for quite some time and has not been overly bullish in the past few years, which means the signs of a potential crash are just not there. That said, this is just my opinion and as we all know, the market will do what it wants, which is why I continue to advise you take a cautious approach.

Looking short term, it is possible that this coming week will be a turning point and that the market will rise consistently over the coming month or so, although this is unconfirmed. Given this, it’s wise to have the mindset that the market could fall for another week or so before it turns to rise.

For now good luck and good trading.

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the bestselling and award-winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online.