Want a reason to worry about your investments? Go type “stock market crash prediction” in your favorite search engine. You can even narrow the search down to the past month. Believe me, you’ll find plenty of reasons to worry.
Many of the concerning predictions focus on the frothy valuations of stocks right now. To be sure, most stocks are expensive. I’m not in the doom-and-gloom camp, though. Here’s one simple reason I don’t think a stock market crash is coming soon.
The best alternative
I’ll cut right to the chase. I don’t think the stock market is about to crash because stocks remain the best alternative for investors. And I’m not just talking about buying and holding for the long term (although I definitely view stocks as the top choice on that front). My take is that stocks are also the best alternative over the short term and mid-term.
There are plenty of assets that investors can own. However, stocks, bonds, and short-term investments such as certificates of deposit (CDs) and money markets are the most popular and liquid alternatives. You can invest in exchange-traded funds (ETFs) and mutual funds, of course, but most of them hold one or more of these core asset types.
Investing in bonds doesn’t seem like a great move right now. Why? Bond prices fall when interest rates rise. It certainly looks like interest rates are headed higher.
The Federal Reserve revealed last week that it plans to taper off its purchases of bonds beginning this month. Sure, Fed chair Jerome Powell said that this move doesn’t necessarily mean that interest rates will be raised. However, it seems to be a good sign that higher rates are more likely than lower rates.
Don’t bank on rates for CDs and money market accounts jumping so much that they become the most attractive place to park money, though. The Fed said that it’s going to move slowly.
In my view, stocks will remain the best choice for investors at least through 2022 and perhaps longer. The stock market will crash again at some point. But as long as stocks offer better potential returns than bonds or other liquid assets, a market meltdown isn’t all that likely barring a major unforeseen crisis.
Let’s assume that I’m right about the stock market not crashing anytime soon. Does that mean that buying pretty much any stock that has performed well over the last couple of years is a good move? Not necessarily.
Just because the stock market is less likely to tank doesn’t override the fact that many stocks are absurdly expensive right now. That’s a big reason why Warren Buffett isn’t buying many stocks these days.
I think that the best bets for investors are to go with stocks that benefit from secular trends that are absolutely unstoppable and/or have reasonable valuations. Brookfield Renewable (NYSE:BEP) (NYSE:BEPC) and Viatris (NASDAQ:VTRS) are two stocks that stand out, in my opinion.
Brookfield Renewable owns hydroelectric, solar, and wind facilities across the world. The demand for renewable energy will almost certainly increase significantly over the next few decades as countries reduce carbon emissions.
The company is positioning itself to meet this increased demand. Its development pipeline capacity is more than 150% of its current capacity. Brookfield Renewable projects average annual total returns of close to 15% over the long term.
Meanwhile, Viatris ranks as one of the cheapest stocks on the market right now. Its shares trade at less than 3.6 times expected earnings. The stock is priced at only 76% of its book value.
Granted, Viatris’ business of selling generic drugs and biosimilars isn’t exactly exciting. But the consensus Wall Street price target reflects an upside potential of nearly 50% over the next 12 months. Analysts seem to think that Viatris has nowhere to go but up. Even if I’m wrong and the stock market does crash, this is one stock that isn’t likely to fall too much because it’s already valued so attractively.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.