How to Invest with a Stock Market Crash Coming

The S&P 500 and Nasdaq both broke record highs last week (Jan. 6) as the Dow nears a record 20,000 points. But with stocks soaring, the possibility of a stock market crash coming is on the rise, too...

Normally, rising stock prices would be great for investors. But if soaring stocks are creating a stock market bubble, then investors need to be prepared for a pullback.

We'll show you exactly how to keep your money safe in case of a stock market crash. Before we do that, we want to show you why the stock market is too high. And what triggers could cause a stock market crash...

Why Is a Stock Market Crash Coming?

Overinflated stock prices could be a sign of a bubble. And stock market bubbles have led to major stock market crashes in the past...

The stock market crash of 1929 was brought on by a stock market bubble.

Simply put, investors bought up stocks because they thought the markets would only go up. This led to investors taking risks they couldn't afford to.

Amateur investors borrowed $8.5 billion (in today's dollars) to buy stocks with. As long as stocks kept going up, everyone was making money. And as long as more people were buying stocks, prices continued to soar.

But when prices began to fall, these investors were forced to sell, sending prices in a downward spiral.

The collapse of the stock market led to an 86% drop in the value of the Dow between September 1929 and June 1932.

Editor's Note: Check Out Our Essential Guide to Buying Gold and Silver

Another speculative bubble would lead to a stock market crash in 2008.

Housing prices were steadily rising in the decade leading up to the crash. Home prices almost doubled between 1996 and 2006.

And just like in the 1920s, soaring prices led investors to believe they would continue to rise. Banks were encouraging home-buying with tantalizing loans. Wall Street began packaging mortgages, even the riskiest subprime mortgages, into tradeable investments. As long as prices continued to rise, everyone was making money.

But home prices would eventually fall. As home prices fell, those who couldn't afford their mortgages were forced to sell or face foreclosure. Prices plummeted. Housing prices fell 30% between 2007 and 2009.

The collapse of the housing market led to a stock market crash and financial crisis. The market crash was so severe the Dow lost nearly 7% of its value on Sept. 29, 2008, the largest single-day fall in Dow history.

Now, we are seeing similar signs of speculation fueling stocks to record highs.

Stocks are soaring, but it isn't economic growth driving prices. Instead, cheap money from low interest rates has flooded into the stock market.

The Fed cut interest rates from over 5% in 2007 down to 0.25% by 2008. Since then, the Fed has only raised interest rates twice, and they continue to remain under 1%.

Low interest rates were meant to make borrowing money cheap so businesses would be more willing to spend money to grow, boosting the economy.

But businesses have taken advantage of cheap borrowing to buy stock. Corporations have borrowed $1.9 trillion since interest rates were slashed in 2008. During the same time, corporations bought back over $2 trillion of their own stock.

This drives up share prices and rewards investors. But it also makes the stock market grow faster than it normally would.

With stock prices artificially inflated through low interest rates, a market correction could be severe.

And it's created the possibility of a stock market crash in 2017...

What Could Cause a Stock Market Crash

Higher interest rates is one of the biggest risk factors of a stock market crash in 2017.

At the December FOMC meeting, the Fed announced it would raise interest rates. This was only the second time the Fed raised rates since slashing them below 1% in 2008.

Trending Now: Three Social Security Secrets the Government Doesn't Want You to Know

The Fed raised rates at the December 2015 FOMC meeting. And the major stock indexes fell more than 10% over the following month. Check out how the market reacted to the 2015 rate hike in the chart below...

stock market crash coming

Even after the most recent rate hike in December 2016, interest rates remain under 1%.

That won't last much longer.

At the same FOMC meeting, Fed officials predicted they would raise interest rates three times in 2017 and push interest rates above 1% for the first time since 2008.

That means borrowing will become more expensive so companies won't be as willing to buy back shares of their own stock.

And with less money going into the stock market, stock prices will fall. As with other stock market crashes in the past, as prices fall, investors sell, causing prices to spiral even lower.

With higher interest rates on the horizon, investors need to be prepared for a stock market crash coming next. That's why we've made our guide on how to protect your money during a market collapse. Here's how to do it...

How to Protect Your Money from a Stock Market Crash

The first piece of a stock market protection plan needs to be gold. When markets fall, investors flee to gold, increasing its price.

[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]

Money Morning Global Credit Strategist Michael Lewitt advises investors to put 10% to 20% of their portfolio in gold.

Buying gold bars is a difficult process since you need to store them in a safe, secure place. But investors can get the same benefits from owning gold by owning a gold-backed ETF. We recommend the SPDR Gold Trust (NYSE Arca: GLD).

GLD is designed to track the physical price of gold. If gold rises, so will GLD.

GLD is currently trading at $113.80 and is already up 3.8% in 2017.

The second part of a stock market crash protection plan is to buy stock in well-managed companies in the "Unstoppable Trend" industries.

Money Morning Chief Investment Strategist Keith Fitz-Gerald says the "Unstoppable Trends" are industries like technology, health, energy, scarcity, demographics, and war. These are industries that never go out of fashion, even if the market is tanking.

Fitz-Gerald recommends three "Unstoppable Trend" stocks.

The first is Raytheon Co. (NYSE: RTN), one of the biggest and best-managed U.S. defense firms. Raytheon has billions of dollars in contracts for traditional and cyber-defense products to governments around the world. Even if the market crashed, countries will still need security. And Raytheon is one of the best companies in the market.

RTN currently trades at $145.72 and is up about 20% since last January.

The second is Microsoft Corp. (Nasdaq: MSFT). Technology is now a necessity of life, and Microsoft is one of the leading companies. Microsoft provides everything from software to phones to web browsing. No matter what the market does, people will still need to log on to their computers.

MSFT currently trades at $62.60 and is up 21% since last year.

The third recommendation is medical supplies firm Becton Dickinson and Co. (NYSE: BDX). BDX makes many one-time use medical supplies for chronically ill patients. It therefore benefits from both trends in health and in demographics.

As people age, they will need healthcare. And people will be aging whether the stock market rises or falls. A leading company like BDX will always be in demand.

BDX trades at $172.81 a share and is up more than 4% already in 2017.

Our third component of a stock market protection plan is for investors willing to take more risk. Shorting the S&P 500 will help investors profit during a stock market crash.

Shorting an entire index can be easily done thanks to ETFs.

Money Morning Capital Wave Strategist Shah Gilani advises recommends ProShares Short S&P 500 (NYSE Arca: SH).

SH is an ETF that moves in the opposite direction of the S&P 500. When the S&P 500 drops, SH will climb.

SH is not a long-term buy. Once the market rises, SH's value will start falling. To work, it needs to be bought shortly before a stock market crash.

Get Our Best Wealth-Building Ideas: Money Morning's top 5 investment reports to grow your money like never before are right here - and they're absolutely free. Read more...

Follow Money Morning on Facebook and Twitter.