We're in the last quarter of 2017 with the Dow sitting near its all-time high. That has some investors wondering if there will be a stock market crash in 2018.
The Dow just hit its highest close ever at 22,775.39 on Thursday, Oct. 5, its fourth day in a row of a record-high close. And this isn't anything new. The Dow is up nearly 25% since a year ago, and it's up 220% since March 2009. In fact, this is the second-longest-running bull market ever.
While the gains have been great for investors with exposure to stocks, it's also making people wonder when it will end - and, especially, if it will end with a 2018 market crash.
Now, no one can forecast the timing of either corrections or the next stock market crash with any accuracy. We certainly aren't predicting a stock market crash, either.
But you should never rule out a crash, and we want our readers to be as prepared as possible for any market event.
Here are the stock market crash warning signs we're seeing and how you can protect your money in case one happens...
The Market Crash Warning Signs to Look Out For in 2018
There are three signs we're following that could lead to a market crash in 2018.
First, analysts are saying that we might be seeing too much of a good thing.
Back in August, analysts from JPMorgan told Business Insider that historically low volatility was a sign of a potential market downturn coming.
In short, when volatility is at historically low levels, it has nowhere else to go but up. Coupled with soaring stocks, higher volatility could mean a stock market correction or even a crash.
The CBOE Volatility Index is even lower now than it was in August.
We don't necessarily subscribe to this theory, but it's one of several reasons not to be complacent with today's soaring stock market.
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Second, the U.S. Federal Reserve is raising interest rates.
In 2008, the Fed slashed interest rates to a historically low 0.25% level. The goal was to give the sagging U.S. economy a lift by making it relatively cheap to borrow funds.
The economic theory is that cheap money makes it possible for businesses to grow, invest in new equipment, and hire people. Enough of that, and businesses will lift the economy up.
But while the economy eventually did climb out of the Great Recession, many businesses used the inexpensive money to purchase their own stock.
In the seven years from 2009 to 2016, public firms borrowed almost $2 trillion. Roughly $2.1 trillion was spent during the period on stock buybacks.
That sort of money helped fuel the bullish stock market. But the Fed has already raised rates four times since 2015, and it is expected to hike rates another three times in 2018 alone. If that happens, rates could rise above 2% for the first time since 2007.
That will mean less money to fuel stocks as rates rise.
Third, stock valuations are at historically high levels.
You see, the Shiller price/earnings (PE) ratio, one of the best measures of stock market valuation, indicates that current valuations are historically high.
The Shiller P/E ratio stands at 30.33. That figure is 82% above the Shiller PE ratio's historical average. In fact, before the 2008 stock market crash, it hit a high of 27.4 in 2007. And the only other times the Shiller PE ratio has reached the current heights were in 1929 and 2000. The market crashed both times.
For prepared investors, we have the two best stocks to buy ahead of any downturn. These are resilient stocks that have outperformed the market in past crashes, and the best part is, they are still going to soar if the market keeps growing...
How to Prepare for a Stock Market Crash in 2018
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Money Morning Chief Investment Strategist Keith Fitz-Gerald recommends Raytheon Co. (NYSE: RTN) and Becton, Dickinson and Co. (NYSE: BDX), because these companies are well-run leaders in the "Unstoppable Trends."
The trick to making huge profits is to find "must-have" companies that fall into what Keith Fitz-Gerald calls the six "Unstoppable Trends": medicine, technology, demographics, scarcity/allocation, energy, and war, terrorism, and ugliness (also known as "defense"). The Unstoppable Trends are backed by trillions of dollars that Washington cannot derail, the Fed cannot meddle with, and Wall Street cannot hijack.
Not only are these stocks resilient during downturns because they are in demand, but they are both sporting double-digit price targets over the next year...
Raytheon Co. (NYSE: RTN) is a leader in the Unstoppable Trend of war, terrorism, and ugliness.
As one of the top five largest defense contractors, Raytheon has billions in contracts with the U.S. government and governments worldwide. International customers make up half of Raytheon's portfolio. And because defense is a global necessity whether the stock market is up or down, Raytheon will always be in demand.
For example, as tensions rise abroad, the United States is more likely to need more weapons and equipment. When the United States launched a missile strike on a Syrian airbase on April 7, Raytheon's stock jumped more than 2%, since its missiles were used. And RTN is up 4% this week as tensions between North Korea and the United States escalate, even as the threat of conflict has pushed the Dow down 1% in the same time.
RTN currently trades at $187.49 a share and pays a 1.70% dividend yield. RTN is up 32.02% this year, and Wall Street analysts are giving it one-year price targets as high as $212. That could bring owners a 13% gain.
Becton, Dickinson and Co. (NYSE: BDX) is our best play for the Unstoppable Trend of demographics.
BDX is a healthcare company specializing in single-usage medical products utilized in hospitals and long-term care facilities. But what makes this an Unstoppable Trend is an aging demographic in the United States. As the population gets older, more people will need medical care, especially long-term care. And because people need healthcare no matter what the stock market is doing, BDX's demand will continue to grow.
BDX is also an exceptionally well-managed company too, which means it's turning that demand into profits for its investors.
Becton Dickinson has a 10.54% profit margin, even after a $12.2 billion takeover of CareFusion two years ago. That means the company's capital management is sustainable and will easily survive a market downturn. But most importantly, BDX transfers those profits to shareholders through its 1.5% dividend yield and growing share price.
BDX trades at $197.49 and is up 19.31% on the year. Wall Street analysts set one-year price targets for BDX as high as $230, a 17% jump.
Editor's Note: "Must-have" companies backed by Unstoppable Trends are a cornerstone of Keith's wealth-building strategy. But there's another type of investment he wants Money Morning Members to know about. It's one of his favorites, a kind of "desert island fund" he'd buy if he had to park his money in one place, "retire" from civilization for 20 years, and come back to a pile of money. Click to learn more…