When Will The Next Crash Hit?
Predicting the future is never easy, especially if you aren’t psychic. Nevertheless, even with a limited set of data, we can try to look at precursors to see if they may be able to help in determining when the next stock market crash may occur. In order to do that, I’m going to look at the historical Monthly Prime Rate (see this link for details on how the prime rate is determined) in addition to the times when there were the biggest up and down movements for the prime rate.
The Major Crashes
Since we do not have data from the mid to late-1920s when the first major crash occurred (1929-1954), we can only go on the times since 1949. This gives us two major crash periods, which some people divide into more than two major crash periods. These crash periods were based on monthly S&P 500 highs and lows, giving us the following periods:
December 1968 to July 1980
December 1968 – High 106.5
June 1970 – Low 75.59
March 1972 – Recovery 107.7
January 1973 – High 118.4
December 1974 – Low 67.07
July 1980 – Recovery 119.8
August 2000 to March 2013
August 2000 – High 1485.46
February 2003 – Low 837.03
May 2007 – Recovery 1511.14
October 2007 – High 1539.66
March 2009 – Low 757.13
March 2013 – Recovery 1550.83
I am considering these to be full crash periods due to the recovery period lasting less than a year before a second long crash period occurs. While some people mistakenly believe that 2003 marked the end of the dot-com bubble, the S&P 500 did not regain its value until May of 2007, and then stocks reached another high in October of 2007 and began crashing soon thereafter due to the housing bubble. As such, it’s actually a 13-year crash period, just as 1968 to 1980 is a 12-year crash period.
The Prime Rate Hits Over 8%
Since January 1949, the Prime Rate did not hit over 8% until June 1969. Now, let’s see when the Prime Rate hits 8% or higher for the first time. In this, we only consider the times it hits 8% or higher, and not continuous 8% or higher readings. When it dips below 8%, we then consider the next time it hits 8% or higher after that. This gives us the following dates:
June 1969 – 8.23%
July 1973 – 8.3%
February 1978 – 8%
May 1987 – 8.14%
November 1994 – 8.15%
July 1999 – 8%
June 2006 – 8.02%
The Prime Rate Has 4+ Months of Changes
Now, let’s look at periods when there were 4 or more changes (positive or negative) in the prime rate around the times that the rate hit 8% or higher for the first crash period (1968-1980). When it is 4 months in a row of changes, I would label this yellow. When it is 5-9 months in a row of changes, I would label this orange. When it is 10+ months in a row of changes, I would label this red.
- Prime Change 5 months in a row December 1968-April 1969 (Higher) ORANGE
- Prime Hits over 8 (8.23) in June 1969
- Prime Change 8 months in a row September 1970-April 1971 (Lower) RED
- Prime Change 4 months in a row May 1971-August 1971 (Higher) YELLOW
- Prime Change 5 months in a row October 1971-February 1972 (Higher) ORANGE
- Prime Change 19 months in a row April 1972-October 1973 (Higher) RED
- Prime Hits over 8 (8.3) in July 1973
Of note, from January 1949 until December 1968, there were no 5 month change periods in the prime rate. The greatest change periods were 4 months (October 1951-January 1952, August 1955-November 1955, June 1966-September 1966). I am not listing the rate changes after July 1973, since it should be obvious that there is a crash going on by that point to anyone.
Next, let’s look at any changes for 4 or more months after the recovery in July of 1980 when the prime rate follows the period of being below 8% and hitting 8% again, which is May of 1987 and November of 1994:
- Prime Hits over 8 (8.14%) in May 1987
- Prime Change 5 months in a row May 1988-September 1988 ORANGE
- Prime Change 5 months in a row September 1991-January 1992 ORANGE
- Prime Change 4 months in a row March 1994-June 1994 YELLOW
- Prime Hits over 8 (8.15) in November 1994
These are relatively calm for overall changes. they do not show any precursor for rate changes before the prime rate hitting 8% nor do they show any red periods of 10+ months of rate changes.
Next, let’s look at when we see rate changes again, which isn’t until 1998:
- Prime Change 4 months in a row September 1998-December 1998 (Lower) YELLOW
- Prime Hits over 8 (8) in July 1999
- Prime Change 5 months in a row February 2000-June 2000 (Higher) ORANGE
- Prime Change 13 months in a row January 2001-January 2002 (Lower) RED
- Prime Change 26 months in a row June 2004-July 2006 (Higher) RED
- Prime Hits over 8 (8.02) in June 2006
- Prime Change 9 months in a row September 2007-May 2008 (Lower) ORANGE
- Prime Change 4 months in a row October 2008-January 2009 (Lower) YELLOW
Based on this data (albeit not a large amount of data until we have a longer projected history of crashes), a conjunction of the prime rate hitting 8% after being below 8% and 5 or more months of changes in a 6-7 month period around that 8% prime rate could be a cause for concern. At the very least, it would be a period to become cautious about funneling money into the stock market and looking into other less risky prospects until the market turns around.
Of note, the current prime rate is 4.5% and we have not had any periods of monthly changes of 5+ since September 2007-May of 2008 (Lower). This should mean, if the prime rate does have any type of predictive power, that we are not yet into a crash period.
Why Pick The Prime Rate?
At the end of the day, I’ve scoured over a slew of sources to see if any had predictive ability to spot trends. While some claim the P/E ratio does, I haven’t found anything to indicate it actually does (see my prior article about that idea). I do have an inkling that sector data downtrends may be somewhat predictive, but I haven’t been able to find a high amount of data other than recent details (see my other article on that data). If sector-based downtrends are predictive, I still cannot say how far in advance these downtrends need to occur before a real crash happens.
I’ve also looked at inflation data and at high yield spread data without any success. So far, the only data that appears to show a trend has been the Prime Rate when it hits 8% or higher and when the months around that change show 5+ months of changes. Small crash periods seem to be less predictable, but occur in a similar pattern where 4 months of changes and 8% or higher prime rate occurrence conjoin.
For the next crash, we’ll see when the prime rate hits 8% or higher and what is happening for the months of changes during that period.
I’m still looking into the margin debt data and oil prices as possible trends for a crash. While predicting a crash may seem like a silly pursuit, it helps me overall to understand the market and dynamics. I am likely going to get it wrong, so take these musings with a grain of salt. I’m not psychic, and you shouldn’t risk your money on my ability to be right (or wrong) if you can’t afford to lose it all.