Worried about a looming ASX 200 crash? Read this…

A market crash generally refers to a fall of 20% or more.

The S&P/ASX 200 Index (ASX: XJO) shook off its early morning losses to close today's session up 0.32%.

That will come as welcome news to investors who've watched the ASX 200 retreat 4.35% since its 13 August all-time closing high.

More recently, the index remains down 2.06% over the past 5 days.

With plenty of bearish headlines making the financial news, should investors be worried about a looming market crash?

For some insight into that answer, we turn to Shane Oliver, head of investment strategy and chief economist at AMP Capital.

Three colleagues stare at a computer screen with serious looks on their faces.

Image source: Getty Images

Is the ASX 200 poised for another crash?

Earlier today, Oliver discussed the outlook for global share markets, including the ASX 200, at AMP Capital's webinar.

And, rest easy, the chief economist isn't forecasting anything as severe as a share market crash, which by most definitions would entail a loss of 20% or more from the August highs.

As for an ASX 200 correction, on the other hand, Oliver said, "maybe we're starting to see one … following a strong run without a correction." He pointed to recent declines in the Aussie, US and global markets of some 4%-5%.

"This will really just be a correction. We've gone a long time without a correction, and we probably are due for one. But it's going to be fairly hard to time," Oliver added, for anyone hoping to sell at the market top and buy at the bottom.

"I don't think there's any precise definition [of a correction]," he said, indicating anywhere from a 5%-15% fall would fit the bill.

According to Oliver, the ASX 200 has come under pressure because "Investors are worried about growth, inflation, the Fed removing stimulus, the upcoming debt ceiling in the US … [and] China, with China Evergrande."

He also mentioned coronavirus as a key risk keeping investors up at night.

While high vaccination rates are the way out, we can expect to see GDP contract in the current quarter.

"There's a long hard slog to get fully out of this," Oliver said. "But vaccine does offer a path out of lockdowns… We should see GDP growing again in the December quarter and into next year."

And then there's the unavoidable ninth month of each year.

The bears come out in September

"September has traditionally been the weakest month of the year," Oliver said, saying he wasn't surprised if the market underwent a correction this month.

Indeed, 7 of the last 10 Septembers on the ASX 200 have seen declines, including last year. Should the index fall lower again this September, that will make it 8 out 11.

Some pundits have linked the September market weakness to crop cycles. Others to investor fatigue.

Oliver instead said the September weakness is, "Possibly related to tax-loss selling in the US. US mutual funds have a tax year ending in September. You sell stocks with a capital loss to offset your capital gains and lower your tax bill."

And as we know, when US markets sell off, the ASX 200 tends to follow.

Dividends, vaccines and earnings tailwinds for ASX 200

Oliver cited a number of reasons he's optimistic for the outlook of shares on the ASX 200.

First, the outlook for dividends, coupled with Australia's generous franking credit scheme:

The dividend yield over the last 12 months has been about 3.5%. Over next 12 months, once you add in franking credits, it's going to be about 5%. So quite a good yield pickup by putting money in the share market.

He pointed to the ultra-low 0.25% interest rate investors can get on their cash savings as increasing the appeal of investing in shares:

That sort of explains why we've seen this rebound in share markets. And ultimately it will prevail yet again, and we'll see money come back in the markets in the year end even though we may go through this short-term correction.

And he doesn't expect rates to go up any time soon, saying investors shouldn't expect a rate rise from the Reserve Bank of Australia until late 2023 or into 2024.

Looking ahead, Oliver said that atop of earnings expectations still being revised upwards:

… Vaccines ultimately allowing a more sustained reopening and tight monetary policy being a long way off augurs well for shares over the next 12 months. I'm still optimistic for the outlook of share markets and growth assets generally.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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