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Do we live in interesting times? It feels like it these days. Every day I read a new article written by a doomsayer predicting the next stock market crash. And every day I check the markets to see record highs being hit on the FTSE 100 and S&P 500. In the midst of my confusion, I turned to that 21st-century oracle, ChatGPT, to see if it could help unravel the situation.
I asked: “When is the next stock market crash?”
It first got the boilerplate disclaimers about how even the best economists or AI models can’t accurately predict stock market crashes. But what it said after piqued my attention. ChatGPT listed six common warning signs of a potential market crash:
Warning signs
- Overvalued markets
- Rising interest rates
- Geopolitical tension or war
- Economic recession or slowdown
- High corporate or consumer debt
- Black swan events
Let’s leave aside items three and six for now. Global conflicts come and go, and there’s little use trying to see which way that particular wind is blowing. Black swan events work similarly. I don’t remember too many soothsayers predicting a global pandemic in the year 2020.
Looking at the rest of the list, however, it’s hard to deny there is real cause for concern. Overvalued markets, in the form of high price-to-earnings ratios compared to historical averages, are a theme of the US. On this side of the pond, valuations aren’t quite so crazy. But as they say, when America sneezes, the rest of the world catches a cold.
How about the other items? Higher interest rates? Weak GDP growth? High debt levels? We’re three for three, as far as I can tell. The US might be doing a little better on GDP growth but that’s down to AI and is considered by many observers to be unsustainable. As far as ChatGPT can tell me, the warnings of a crash are there.
Diversification
This is why I believe a stock like BP (LSE: BP.) is worth considering today. The oil major trades at relatively low levels — its price-to-earnings ratio around 12 at present. That means it has less far to fall in the event of market turbulence.
Oil is also considered a ‘defensive’ sector. That means it is less affected by rough times. People are still going to drive to work and buy things with plastic. Though a risk is that if a crash leads to an economic downturn then this will impact demand of BP’s products.
As we like to say a lot at the Motley Fool, one of the pillars of investing is diversification. Putting all your eggs in one basket creates a lot of risk if you pick the wrong basket. The dotcom crash is a good example of this where anyone betting on tech may have come out very badly. The BP share price, on the other hand, was barely affected.
One last thing, just for fun, I asked ChatGPT for the exact date of the next stock market crash. It replied with its “purely fictional” proposed date of 16 May 2026. The markets will, according to this playful prediction, drop 18% in a day due to a problem with “deepfake derivatives”. One to slot into the diary, perhaps.
