There was a small market crash a couple of days ago. I don’t think the worst is over yet, and at least one renowned investor would agree with me. But I would still buy UK shares.
Andrew Parlin, founder and chief investment officer of investment firm Washington Peak, described the situation this way: “When and how this ends is impossible to say. But with the Fed pursuing thunderous asset purchases and getting ever softer on its 2% inflation target, the bubble is firmly on track to be one of biggest in stock market history”.
Unfortunately, a bubble is normally followed by a stock market crash. And such a situation in the US will probably make UK investors suffer too. After all, the 1990s dot-com bubble badly affected the Footsie. There are usually important factors that trigger the bubble’s collapse. Those kinds of factors are plentiful supply right now, which is most worrying.
Reasons for a market crash
To start with, the growing tensions between the EU and the UK pose a significant risk to the stock market. The more I read the news, the more likely it seems the UK will leave the European Union without a deal.
Then, it’s also the excessive valuation of the US stock market. This despite the macroeconomic indicators not recovering as fast as many people would like to see. What’s more, there is plenty of uncertainty about the November presidential elections.
But the whole world is also worried about the long-lasting coronavirus pandemic, of course. It looks like there will be several waves of infection. It’s unclear how long it will take for an effective vaccine to become available to everyone.
Famous bubbles in history
Earlier I compared the current situation to the 1990s high-tech euphoria. There have been many other bubbles throughout history. One of the most famous was the Tulipmania craze in the Netherlands in the 1630s. At the time, interest in tulips was crazy. Unbelievable sums of money were offered for a single bulb. In the end, however, the bulbs lost most of their value.
The Great Depression in the US was the result of a bubble. The US Federal Reserve was established in 1913. In the 1920s businesses, customers, and investors were supplied with really cheap money by the Fed. Debt levels became enormous. This was particularly true of consumers. They rushed to buy radios and automobiles with borrowed money. Stock market speculators also bought low-quality shares in automobile, motion picture, and aircraft industries. The bubble burst in 1929, beginning the Great Depression.
Here’s what I’d do right now
All that sounds very grim. But the good thing is that market crashes lead to great gains. The wisest thing to do is to buy shares after stock markets collapse. My colleague Royston Wild suggested two high-quality picks. But I can assure you that more bright investment ideas are available in The Motley Fool catalogues.
