Could the stock market crash in 2024? This is what I’m doing!

There are many headlines at the moment warning of an impending stock market crash.

Many who predict an impending catastrophic event point to an overvalued U.S. stock market as evidence. They suggest that the S&P500immediately rolling price-earnings ratio (P/E) of 27.8 – compared to the historical average since 1990 of 23.3 – is too expensive and that investors will soon be spooked.

Others are closely following Warren Buffett’s actions. Its investment vehicle, Berkshire Hathawayexchanged shares for cash. As of September 30, 2024, the company was sitting on a cash pile of $320 billion. That’s an increase of $168 billion in twelve months. If the American billionaire sells his money, he must think a crash is coming, the argument goes.

The Buffett Indicator, which measures the value of the stock market relative to the U.S. economy as a whole – a bit like a national price-to-earnings ratio – is close to its all-time high. At 195.6, this is more than double the 20-year historical average of 98.9.

Cheer up!

But I am more positive.

The S&P 500 is currently being blown up by the Magnificent Seven technology giants. Excluding these, the price/earnings ratio of the index falls below 20.

It is true that stock market crashes have been preceded by long bull runs. In 1987, Black Monday took place after the Dow Jones Industrial Average increased by 250% in the past five years. However, since November 2019, the S&P 500 has risen ‘only’ 87%.

And Warren Buffett hinted that he is selling stocks for tax reasons and not because he fears the worst. Yes, his indicator is high. But it has been rising for decades. And he has continued to hold shares through many new highs, suggesting he doesn’t rely heavily on his namesake metric.

Slow and steady

Berkshire Hathaway also does not appear to be focusing on defensive sectors – such as utilities – that investors typically buy when a period of instability is expected.

Defensive assets include stocks such as National network (LSE:NG.). It transports and distributes electricity and gas in the UK and US. Energy demand is largely unaffected by economic and financial turmoil.

Combined with the lack of competition, the company has certainty about its return on capital, meaning it can confidently predict annual earnings per share growth of 6% to 8% through 2029. And it plans to to do that too. grow the dividend in line with inflation. Of course there are no guarantees.

But it did surprise investors in June when it announced a £7 billion rights issue. And it carries a large amount of debt.

But mainly because of the reliability of the earnings numbers, this is the kind of stock I would buy if I thought a crash was coming.

Keep going

Yet I don’t fear the worst.

Don’t get me wrong: I’m sure there will be another crash at some point in the rest of my investing life. History suggests that it will be so. And when it does, the doomsayers will take credit for predicting its arrival. After all, a broken clock is right twice a day.

But I’ll keep doing what I’ve always done. And that’s buying shares of well-managed companies – with strong balance sheets – that are likely to weather periods of market turmoil in the years and decades to come.