How will this crisis affect investing in stocks?

Stock investing began the week in bearish territory, raising concerns about worsening market conditions and raising fears of a new crisis. But what this crisis will look like and whether it will resemble those of the past is a topic of debate among investors. After all, as Mark Twain said:

Which crises are most similar to the one brewing now?​

The dotcom crash of 2000​

It would be easy to compare current market conditions to the dotcom bust. Recent low interest rates and technological innovations have facilitated a boom in certain speculative assets, such as investing in disruptive technology stocks, cryptocurrencies, and meme stocks. We've seen valuations of unfunded companies skyrocket and ultimately deflate, just as we saw two decades ago.

This wouldn't be the worst outcome. While the dot-com crash was brutal for tech stocks (the Nasdaq fell 82% and didn't recover for 16 years), the fallout barely affected the U.S. economy or other assets. US GDP saw a brief, shallow decline, while bonds, commodities and the housing market were unchanged.

The global financial crisis of 2008-09

This economic crisis was preceded by a period of economic growth, stability and low inflation. And, in that sense, that is no different than today. However, that prior stability set the conditions for the subsequent collapse: easy access to financing and a no-lose approach to risk assets. Credit facilitated the use of significant leverage, while financial engineering hid the true risks brewing beneath the surface.

Then the unthinkable happened when real estate prices began to fall. The whole house of cards collapsed. And with banks at the center of the storm, risks quickly spread to other sectors. The crisis caused enormous economic losses. GDP collapsed at its fastest pace since the 1930s, the financial system froze, and investment in stocks across all types of sectors ground to a halt.

The stagflation crisis of the 1970s️​

Now, the two previous crises were also preceded by very high oil prices and somewhat higher inflation, but nothing compared to what happened in the 70s, when the Fed was forced to aggressively raise interest rates to deal with to control double-digit inflation. In that sense, today's environment looks eerily similar to that period.

What followed in the 1970s was disastrous: The economy twice fell into recession during that period, first in 1973 and again in 1980. But the worst was the realization that slower economic growth does not always reduce inflation.

So, which crisis is most likely to repeat itself?洛​

A repeat of the dotcom crash is a real possibility. Tech company valuations are arguably as extreme as they were then, and with no capitulation in sight, it looks like the Nasdaq has a lot further to fall. But this time, it seems less likely that the sell-off will be limited only to investing in stocks in riskier sectors. Bond yields have seen the most extreme moves in their history, and that is likely to affect key segments of the broader economy, from the housing market to mutual funds.

Another financial crisis like the one in 2008 is much less likely. They took important measures after the last accident. Furthermore, today, the real economy is in a much better position: consumers have more money saved and have less debt. The companies are also in better financial shape and still benefiting from record margins. The financial sector is also better equipped to deal with a shock. Banks are better capitalized and there are fewer signs of extreme leverage in the system.

How will it affect investing in stocks?啕​

The big concern is those 1970s-style headwinds. The high inflation we have today is likely to worsen the recent decline in US stocks and complicate their recovery. Unlike past recessions, when the Fed took steps to lower interest rates to spur stock investment and job growth, the Fed likely won't be much help now. They will focus on raising interest rates to try to control inflation. That will reduce growth, but as the recessions of the 1970s demonstrated, it may not be enough to cool inflation, and we may have to live in a less than ideal environment of slow growth and high inflation for years to come. .

What our little trip back in time has shown is that the next crisis is likely to mirror those of the past. It may probably be a crisis that shares elements of each of the previous ones.

So is there any chance in all this?️‍️​

All this sounds very pessimistic but let's remember that we are talking about the next crisis. As investors, it is wise to hope for the best, but prepare for the worst. As we have said repeatedly in recent months, now is the time to be defensive with our portfolio management. When investing in stocks, look for companies in defensive industries. Also diversify investing in stocks from other regions (such as Europe, Japan and China) and styles (such as value stocks over growth stocks).

Additionally, we must ensure that we have assets that can perform well in different environments. We can diversify with:

• An investment in shares (perform better in a declining growth environment with low inflation)
• An investment in assets such as Treasury bond (better in a low growth environment with inflation)
• An investment in physical (best in a growth environment decrecent and higher inflation) and
• An investment in other raw materials (better in an environment of growing growth and high inflation).

And to protect ourselves against the risk of seeing all our assets fall at the same time, we can also consider buying American dollars.

Last but not least, we need to make sure we have enough cash on hand to take advantage of the opportunities that will arise to make an investment in stocks when other investors throw in the towel and sell, which many undoubtedly will. And if we have a long-term horizon, we won't sell when things look bleakest. As Peter Lynch said: