Financial Planning & Wealth Management

Are we ready for a Market Crash?

I’ve written about the US market being at all-time highs before. I write about the US because that’s where all the growth of the past 10 years has come from.

 

We like to be negative about South Africa’s low growth rate. I had a look at my Eskom app and see we haven’t had loadshedding in 10 days now. I’m feeling more positive.

 

But the truth is the rest of the world is faring pretty badly as well. The UK, Europe, Australia, China, South America. All incredibly low growth rates and poor market returns. We are not alone.

 

This is because these economies are largely made up of ‘old world’ companies – banks, insurers, mining companies, energy companies, pharmaceuticals, retailers. These are the basic and necessary pieces of an economic system, but they don’t inspire great innovation.

 

The real innovation of the past 10 years has come from a small group of technology ‘super competitor’ companies.

 

This is why I focus the bulk of my attention on the US where these companies are based.

 

With the US markets at all-time highs, the next question is – what would happen in the event of a market crash or correction? These things tend to happen after stunning runs.

 

Let’s have a look at the US consumer or household. How are they faring right now.

 

The chart below shows the change in the amount of money held in checkable (savings) accounts in the US between 1994 and today.  The total is currently about $4.3 trillion.

 

Chart: Cash balances sitting in US Household bank accounts

A few observations:

  • The trend between 1994 and 2008 was downwards – US households were holding less and less money in their savings accounts over this time.
  • In 2008 we had the Global Financial Crisis. Households went into that crash with very little cash buffer. They weren’t prepared.
  • Since 2008, the amount of money kept in checking account increased considerably. Clearly, the US household has learnt to save.
  • There was a massive increase in savings just before the Covid market crash, where total savings went from $1 trillion to about $4.3 trillion today.

 

With $4.3 trillion sitting in checking accounts, I would think the US household could weather a financial crash if it were to happen. That’s a lot of cash buffer.

 

Here’s another view – the chart below shows the amount of money sitting in US money market funds over the same period.

 

Chart: Total USD sitting in Money Market Funds

The trend is similar. Money market funds are sitting at record levels today with over $6 trillion invested. It’s not surprising given that you can today get about 5% in USD guaranteed from a money market account.

 

Why take on market risk to get an 8% return when I can take on no risk and get 5%?

 

Again, this points to a healthy US household that is well positioned should any market crash or correction.

 

The chart below shows US household debt as a % of disposable income since 2000. Have a close look at that trend – households became more indebted from 2000 to 2008, and then begin to significantly reduce this after 2008.

 

Chart:  US household debt as a % of disposable income

The point is that the US household went into the Global Financial Crisis of 2008 with very little cash on hand and high levels of debt.

 

In contrast, today they are flush with cash, have low levels of debt, and are at close to full employment.

 

What’s to say we don’t have a roaring twenties again? I would stay fully invested.

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About

 MattFin is a blog that focuses on wealth management, investments, financial markets and investor psychology. I build financial plans and portfolios for families and individuals

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