What happens if stocks tank?

[Sam Brazil]

The S&P500 is soaring and of course lots of folks are chattering about how a stock crash is inevitable.

Just for the sake of a mental exercise, assume they're right and the stock market is going to imminently crash...Given the relationship between the 4 PP asset classes, and the current economic environment, what do you think would happen to the other 3 asset classes if the stock market crashed?

[EdwardjK]

Assuming no change by the Fed in interest rates, I suspect gold will increase when equities decline.

At least I hope so.

[Pointedstick]

Bonds may rise too as people flee to "safe" assets. But who knows?

[dualstow]

I have an occasional pessimistic feeling that we will see stocks and bonds fall together, and hard, for a little while. It's not so strange - they've both been rising for a while now. Maybe we will see all three non-cash assets fall together like Arby's-eating skydivers, on many days.

I can't wait to see that I was wrong but even if my feelings turn out not to be wrong, I have optimistic feelings that if stocks really tank for an extended period, bonds and gold (I call them the BeeGees when they're together) will find their way up and we'll be thumbing our noses at all the stock fanatics once again.

[Tyler]

When the stock market crashes, we'll see the next wave of new PP investors signing up and gold + bonds will shoot sky high. 

[barrett]

No idea what The Brothers Gibb (Thank you, Dualstow!) would do, but as a PPer you would have a lot of cash handy to pick up stocks at a discount.

A crash is only inevitable in the long term, of course. If we had a correction of, say, 20%, your PP would only be down 5% and stock valuations would be back in line with their historic average more or less.

I actually think that with interest rates this low we could see high valuations in stocks and bonds for quite a while.

[mortalpawn]

Historically (at least for the last few big crashes) treasuries do well as the stock market goes down.  Sometimes there is a lag period where both go down at the same time, likely due to a rush to generate liquidity to cover margins, but this is generally short lived, and we typically see the bond market (particularly treasuries) do well as people seek a safe haven.  Given that treasuries are already at historic highs, it may not be a huge gain, but they should not go down.  Despite declining faith in the government, US treasuries are still perceived as a safe haven in times of market trouble.

Gold could go down in the short term or in a small stock correction, again due to people selling assets to cover liquidity shortfalls elsewhere, but would probably be a long term gain particularly if the stock market had a major correction.

I'm speaking of a significant correction in stocks above, not a worst case scenario such as collapse of the derivatives market (which here in the US is $210 trillion, dwarfing both the stock market at $70 trillion and the global GDP of $66 trillion) or collapse of the dollar.  Though these are remote scenarios, they could lead to a collapse of both treasuries and stocks.  As others have pointed out gold would be an amazing asset to hold in these unlikely cases.

[push3r]

Thanks mortalpawn, I have been wondering about the environment we are in with gold, stock, and bond, all at historic high. I am 100% cash (re-doing retirement investment) and don't want to jump in the water yet.  Your comment makes a lot sense as to the gold covering the bases for situations that don't happen too often.  Now I am fighting whether to go with 30/60/10 or PP.

gold, why do you make my life so difficult.

[Ad Orientem]

The last time stocks took a swan dive LTTs took off like a rocket. If you consider where long term JGBs have gone in their yields, I'd say there is still a lot of potential downside to US 30 year bond yields. I'd also give a nod to gold which might benefit if the FED decided to break out the monetary nukes.

[mortalpawn]

Now I am fighting whether to go with 30/60/10 or PP.

I would certainly recommend the PP.  I think if things do go South (as some of us think is possible with the great zero-interest-rate/money-printing "experiment" currently happening worldwide), the PP would hold up much better.  While its easy to be attracted to 30/60/10 with stocks and bonds near all time highs, holding 25% gold and 25% cash might look a whole lot smarter if the bubbles pop in the next few years. 

Also if we ever see a black swan type event, again the PP will preserve your wealth better.

[magneto]

With QE etc, continue with the belief that too much money is chasing the limited supply of assets.
We know bonds are expensive with low yields after the 30 year plus bull market.
Stocks as OP observes have had a good run, and now look toppy by historic valuations, see:-
http://www.smithers.co.uk/page.php?id=34
So that just leaves gold and cash.
Gold may have suffered from the same flood of money phenomenom but has at least come off it's excessive peak, so might hold or rally.
Cash has never looked so attractive as a safe haven, even if the yields are dismal.

[portart]

Now you tell me... should have cash out a few weeks ago.. actually I did and went back in, dummy that I am.

[bedraggled]

Jim Rogers, the commodities fan, is looking to buy more gold when it declines to 50% of its $1,900 high of a few years ago- at around $950.  Rogers suggests there is plenty of time as it took 10 years to make that high.  Check out Rogers on Youtube.

Harry Dent, the deflationist, recently, said gold drops to $600.  He said a year or so ago that gold back to the starting point of $250 is a possibility.  Dent is also on Youtube.

I don't think either is in PP.

[dualstow]

Now you tell me... should have cash out a few weeks ago.. actually I did and went back in, dummy that I am.

If Budd is our resident worrier, you are our restless tinkerer.
I know, it's hard to just sit there and do nothing.

[buddtholomew]

Now you tell me... should have cash out a few weeks ago.. actually I did and went back in, dummy that I am.

If Budd is our resident worrier, you are our restless tinkerer.
I know, it's hard to just sit there and do nothing.

dualstow, mind if I borrow "resident worrier" for my signature line?

[dualstow]

dualstow, mind if I borrow "resident worrier" for my signature line?

I'd be honored. 
I wish we could have vanity titles instead of "Executive Member" right under our names.

[buddtholomew]

dualstow, mind if I borrow "resident worrier" for my signature line?

I'd be honored. 
I wish we could have vanity titles instead of "Executive Member" right under our names.

Hahaha, done. Thanks.