What Could Cause the Next Stock Market Crash?

The Dow, S&P 500, and Nasdaq each opened at all-time highs Thursday as the eight-year bull market rages on. But the record-breaking highs have investors wondering when the next stock market crash could come...

next stock market crashThis bull market may be great news for stock portfolios, but there are some signs that stocks are reaching unsustainable highs, which could lead to another stock market crash.

We aren't predicting a market crash in 2017. But we do want our readers to be as informed and prepared as possible.

Here's why some investors are concerned that stock prices have gotten too high, plus the three best stocks to own during a market crash...

What History Tells Us About Stock Market Crashes

It's impossible to predict the exact timing of the next stock market crash, but we can look at history to see why the markets crashed before.

Take the most famous stock market crash of all, for example. The stock market crash of 1929 was the result of risky, speculative stock purchases. Investors operating under the belief that the market could never fall took unhealthy risks to buy more stocks. Investors borrowed more than $120 billion (inflation adjusted) to buy stocks on margin.

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This speculation sent share prices soaring over 300% between 1922 and 1929, but it also led to a stock market bubble.

And the bubble eventually popped...

On Oct. 28, 1929 - Black Monday - the stock market dropped 13%. The sudden fall sent investors into a panic, especially those who had to pay back margin loans. By the time the panic ended in 1932, the Dow had lost 86% of its value.

While the 1929 stock market crash was especially severe, it shows us how a long period of speculative investing can push stocks too high.

And we are seeing evidence that could be the case today...

What Could Cause the Next Stock Market Crash?

The Dow has soared more than 208% since March 2009 and 10% since 2017 started. Not only has the Dow shattered all-time highs, but it surged between 20,000 and 21,000 points during February in its fastest 1,000-point gain ever.

But there are signs stock prices have been pushed to overinflated levels.

The Shiller P/E ratio is one measure of the stock market's value. Economist Robert Shiller developed his P/E ratio to more accurately measure overall stock market value.

And the Shiller P/E ratio is currently at 30.12, 79% above its historical average. Today's level is even higher than just before the 2008 stock market crash, when it peaked at 27.4.

The reason the stock market is overvalued comes down to low interest rates from the U.S. Federal Reserve. After the 2008 stock market crash, the Fed slashed rates from over 5% to 0.25% and kept them below 1% until this year.

These record-low rates were meant to make borrowing money cheap and easy in hopes that business would use the money to grow.

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Instead, businesses used the cheap borrowing costs to repurchase shares of their own stock. Since 2008, publicly traded companies have repurchased more than $2 trillion of their own shares while borrowing $1.9 trillion.

That means it's unlikely so much money would have poured into the stock market if it weren't for low interest rates. Now that the Fed is committing to raising interest rates again - with two rate hikes already this year - whether the stock market's surge is sustainable is a serious question.

But savvy investors are always thinking ahead; that's why we're showing you the three best stocks to own when the market gets volatile.

These stocks will hold their value during a crash and could even bring you a profit as the markets fall too...

The 3 Best Stocks to Own During a Volatile Stock Market

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It's impossible to time the market, but investors can be strategic. One of the best strategies for a volatile market is owning resilient stocks.

Money Morning Chief Investment Strategist Keith Fitz-Gerald thinks investors should hold on to stocks in the six "Unstoppable Trends." The trick to making huge profits is to find "must-have" companies that fall into these 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.

By owning well-run companies in these Unstoppable Trends, you'll own resilient stocks that will charge out of any market downturn, leaving behind anyone who sold off stocks for other assets. And if the market doesn't crash, these stocks are still going up.

That's why we're bringing you three of our favorite stocks from the Unstoppable Trends.

Microsoft Corp. (Nasdaq: MSFT) is a leading company in the Unstoppable Trend of technology.

The reality is that technology is here to stay; individuals and businesses across the world rely on it to function. Microsoft is a well-managed company and is a leader in the tech industry. That means MSFT will bounce back after a downturn.

Microsoft is also constantly innovating to stay on top of the tech world. Businesses and individual consumers are increasingly relying on cloud storage to manage their daily lives. And Microsoft's new Azure cloud platform is poised to fend off its rivals by integrating Microsoft software, something CEO Satya Nadella calls "Software as a Service." So even if the market dives, Microsoft services are still going to be in demand. Its Azure cloud computing service is now the second-largest cloud service in the world.

MSFT trades at $73.92 a share and pays a 2.1% dividend yield. MSFT is up 19% on the year.

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Becton, Dickinson and Co. (NYSE: BDX) is an example of a play in the Unstoppable Trend of demographics.

BDX is a healthcare company specializing in one-time use medical products used in hospitals and long-term care facilities. That means as populations age, more people will need this type of medical care, and BDX will be in even more demand. People will need healthcare whether the market falls or not.

But BDX is also an exceptionally well-managed company. It has a 10.54% profit margin and maintains a 1.58% dividend yield, 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. And that's good news for its shareholders during a stock market crash.

BDX trades at $202.42 and pays a 1.4% dividend yield. BDX is up 22% year to date.

Raytheon Co. (NYSE: RTN) is our play for the trend of war, terrorism, and ugliness.

Raytheon is a leader in the defense industry with billions in contracts with the U.S. government and other countries across the world. That means if the market falls, Raytheon is going to continue to excel over the long term.

Raytheon has billion-dollar contracts with the U.S. government, but it also has a diverse customer base. International customers make up just under half of its business. That means even if a few countries cut defense spending during an economic downturn, RTN still has plenty of other customers to help it weather the storm.

But RTN's real allure as an Unstoppable Trend pick is the fact that war is a reality of the world. For instance, the United States just made a $110 billion deal to allow Saudi Arabia to purchase weapons from U.S. companies, and Raytheon is a benefactor.

RTN currently trades at $169.09 a share and pays a 1.89% dividend yield. RTN is up 19% this year.

The Bottom Line: No one can predict the timing of a stock market crash, but that doesn't mean investors can get away without preparing for one. And with stocks soaring to record highs right now, investors could get hit when they least expect it. That's why owning stocks in the Unstoppable Trends - like Microsoft, Becton Dickinson, and Raytheon - can help any portfolio during times of instability and uncertainty.

This Stock Is Beating the Markets 16 to 1 - and It's Just Getting Started

Investing should be profitable. But the average market index fund may hit 8% a year... if it's lucky.

A 401(k) or IRA may do 7%... if you've got good management. The average hedge fund... well, they've been clobbered lately.

Meanwhile, one of Keith Fitz-Gerald's recent picks in his Money Map Report is beating the markets 16 to 1. It's up more than 22% since June 20.

It's just the latest winner from Keith, who regularly finds stocks set to rise on high-profit trends.

You can find out how to get that and all Keith's Money Map Report recommendations here.

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