Over the past 18 months, Wall Street and investors have experienced a historic rebound in the S&P 500 (SNPINDEX: ^ GSPC). After losing a third of its value in less than five weeks, the widely followed index has doubled from its bear market low in less than 17 months.
Sadly, all rallies end up ending on Wall Street.
While we can’t accurately predict when a stock market crash will occur, how long it will last, how pronounced the decline will be, or even what will trigger it in advance, we know that crashes and corrections are. normal occurrences – and one might be brewing.
A stock market crash could happen
History offers a clue to the end of the current record rally. After each of the previous eight bear market lows, dating back to 1960, the benchmark S&P 500 has experienced one or two double-digit decline percentages in three years. We’re halfway there and haven’t seen a noticeable fix yet.
Another major concern is valuation. The S&P 500 closed on September 27 with a Shiller price / earnings (P / E) ratio of 38.4. The Shiller P / E examines inflation-adjusted earnings over the past 10 years. A reading of 38.4 for the S&P 500 is near a two-decade high and well over double the 151-year average reading for the index. More importantly, the previous four times Shiller’s P / E ratio exceeded 30, the index then lost at least 20%.
The increase in margin debt is also of concern. Margin debt describes the amount of money borrowed with interest to buy or short sell securities. While it is not uncommon to see margin debt increase over time, it is unusual to see margin debt increase rapidly over a short period of time.
There have been three instances in the past quarter century where margin debt has grown 60% or more in a single year. One of those cases happened this year. The previous two directly preceded the bursting of the dot-com bubble and the Great Recession.
And, as noted, crashes and fixes are quite normal when investing in the planet’s greatest long-term wealth creator. There have been 38 double-digit crashes or percentage fixes in the S&P 500 since the start of 1950. This corresponds to a correction every 1.87 years. While Wall Street doesn’t strictly follow averages, it puts into perspective how common it is for stocks to drop out every now and then.
A crash would be the perfect time to buy those unstoppable stocks
While stock market crashes and sharp corrections tend to put investors on high alert, they are actually the perfect opportunity to shop. All notable declines in the stock market were eventually wiped out by a bullish market rally. Buying big companies and being patient is usually a recipe for building wealth.
If the market were to collapse or suffer a strong correction, buying this trio of unstoppable stocks would be a wise move.
Although financial stocks are very cyclical, the payment processing giant MasterCard (NYSE: MA) could definitely be described as unstoppable, and would be perfect for picking up on a discount in the event of a crash or fix.
Believe it or not, the cyclical nature of Mastercard’s operations is arguably its greatest strength. Yes, times of economic contraction and recession are inevitable. When national and global economies are struggling, businesses and individuals spend less, which means less income for merchants for Mastercard. However, periods of contraction usually last a few months or a few quarters at most. By comparison, the last economic expansion in the United States lasted 11 years. Mastercard benefits immensely from these disproportionately long periods of expansion at home and abroad.
Mastercard’s success is also a function of its purpose. This is a company that deals strictly with the processing side of the equation and has resisted the urge to become a lender. While not lending in theory costs the business the opportunity to earn interest and commission income, it also means that Mastercard has no liability when credit defaults increase during recessions. Not having to set aside capital to cover credit losses is one of the main reasons the company’s profit margin has remained above 40%.
In addition, the majority of global transactions are still carried out in cash. Mastercard has a long track with which to push its payment infrastructure into emerging and underbanked regions of the world.
For cautious investors who favor minimal volatility and stable income, utility stocks NextEra Energy (NYSE: NEE) would be a really smart place to put your money to work if a stock market crash happened.
The first thing that works in NextEra’s favor is that it provides a basic service: electricity. It doesn’t matter how well the stock market or the US economy is performing, the demand for electricity among homeowners and tenants doesn’t fluctuate much from year to year. As an electricity supplier, NextEra can count on highly predictable cash flow, which helps its management team invest capital for projects without compromising the company’s profitability or payments.
What really sets NextEra Energy apart is its focus on renewable energies. No utility in the United States currently generates more capacity from solar or wind power than NextEra. And with the company injecting $ 50-55 billion (in total) into new infrastructure projects between 2020 and 2022, no company will be close to NextEra in terms of renewable energy production for long.
While these projects don’t come cheap, they dramatically reduce the cost of generating electricity and have driven the company’s compound annual growth rate to high numbers for over a decade. By comparison, most electric utilities have a low single-digit growth rate.
A final layer of security can be found with the company’s regulated utility operations (i.e. those that are not powered by renewable sources). While regulated utilities cannot increase their prices at will, they are also not exposed to potentially volatile wholesale electricity prices. Thus, NextEra’s regulated operations add to the predictability of its cash flows.
The third unstoppable security to buy in the event of a stock market crash is the dominant player in e-commerce Amazon (NASDAQ: AMZN).
When I say Amazon is a dominant online retailer, I mean it in every sense of the word. When eMarketer released a report at the end of April examining the market share of online sales in the United States in 2021, it estimated that Amazon would control about $ 0.40 of every $ 1 spent nationally. Walmart is the second largest online retailer in terms of market share, and Amazon has more than five times its share.
But Amazon is well aware that retail margins aren’t the best. That’s why it actively promotes its Prime subscription service. Amazon collects tens of billions in revenue each year from its subscriptions, which plays a key role in keeping retail margins low and ensuring the company can lower prices from traditional retailers. Prime members are also encouraged to stay in the Amazon ecosystem of products and services.
What is too often overlooked with Amazon is that it is also the most dominant company in cloud infrastructure services. Amazon Web Services (AWS) currently generates more than $ 59 billion in annual sales, and AWS generated nearly a third of global cloud infrastructure spending in the first quarter, according to Canalys.
This is important, because cloud and subscription services offer considerably juicier margins than online retail sales. As a result, these segments are expected to play a key role in more than doubling Amazon’s operating cash flow by the middle of the decade.
This article represents the opinion of the author, who may disagree with the âofficialâ recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.