Should investors be worried about a Great Depression 2.0?

As the stock market surges in a post-election rally, analysis of the S&P 500’s historical movement hints at potentially troubling times ahead.

The index has reached a new record high above 5,900, reacting positively to Donald Trump’s re-election. Trump is widely viewed as bullish on the economy and equities.

Despite these gains, analysis suggests the market should prepare for a possible ‘Great Depression 2.0,’ considering the index has exhibited cycles of dramatic growth followed by corrections, as technical analyst Gert van Lagen noted in an X post on November 7.

“Target of ⑤: line through ① and ③ at ~ 6000 is almost hit. Great Depression II inbound?”– Gert van Lagen

Lagen’s analysis traces the rise of the S&P 500, starting with an early growth phase that led to the severe market crash of 1929, triggering the first Great Depression.

Over the years, the market has experienced growth momentum alongside corrections tied to historic crises such as the Dot-com Bubble and the 2008 financial crisis. 

According to Lagen, the current S&P 500 rally might be aligning with what he termed the final ‘blow-off,’ especially with the 6,000 record high in sight.  

If this analysis is accurate, the market may be approaching the end of a prolonged upward cycle, potentially setting the stage for a sharp downturn.

Cash cushion from potential crash

The analyst also explored establishing a defensive mechanism if a crash occurs. To this end, he believes accumulating cash might be an ideal option. In this case, he considers Warren Buffett’s Berkshire Hathaway might be anticipating a significant downturn, considering the investment conglomerate now holds a record of $325.2 billion in reserves. 

Interestingly, a previous Finbold report indicated that Tesla (NASDAQ: TSLA) CEO Elon Musk hinted the continued accumulation of cash by the ‘Oracle of Omaha’ might be preparing for a stock market crash.

Economist Henrik Zeberg also supports the warning about a possible market crash. He believes the economy may be on the brink of one of the worst crashes in history. 

Zeberg expects most investment assets to likely hit new record highs before collapsing. Specifically, he forecasts the S&P 500 could reach a high above 6,000 before a downturn.

Amid the warnings, there is no consensus on the timing of such an event. However, figures like author and financial educator Robert Kiyosaki suggest the crash is already underway.

Impact of Trump’s fuelled stock market rally 

Meanwhile, the stock market is witnessing increased capital inflow in reaction to Trump’s win, which is considered bullish for the economy. Trump’s proposed corporate tax cuts and deregulation policies are viewed as possible catalysts for economic growth, potentially extending the stock market’s sustained rally. 

The concerns for a possible crash are elevated because some equities leading the ongoing rally might be overvalued. For instance, although software giant Palantir (NYSE: PLTR) is hitting new highs, the stock has seen price revisions to the downside, with analysts warning that the share price does not match the company’s actual valuation. 

In summary, it remains to be seen how the stock market will sustain the momentum of Trump’s victory and how far the index will rally. However, with technical indicators suggesting tough times ahead, investors need to explore possible cushioning. 

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