Inflation chatter is intensifying, and investors are concerned a major stock market correction or crash could be on the cards. But is that really likely and if so, would it result in indices crashing all over the world or only in certain jurisdictions?
Where the S&P 500 goes, the FTSE 100 follows
Global indices tend to follow the trend of the United States, but not always to the same degree. We can see this via the performance of the FTSE 100 and S&P 500 in the past year. The FTSE 100 has risen 35% since the March stock market crash in 2020. Meanwhile, the S&P 500 has risen 81% in that time. Both are down from their 52-week highs. But optimism still runs high in some areas, with tension and uncertainty building elsewhere.
The FTSE 100 tracks the performance of the UK’s 100 largest publicly listed companies by market capitalisation. The S&P 500 does the same for America’s 500 biggest companies.
While they’re similar, the indices contain different types of businesses.
The FTSE 100 is heavily weighted towards commodities and banking stocks. Meanwhile, the S&P 500 is more heavily weighted towards technology, healthcare, and consumer discretionary stocks.
After the March 2020 stock market crash, tech and healthcare stocks were two popular sectors while banking stocks fell out of favour.
Yet inflation will weigh heavily on tech stocks, while commodities could benefit. Therefore, I think the FTSE 100 is more likely to bounce back from the effects of inflation better than the S&P 500.
Is a stock market crash coming soon?
As the world is going through an unprecedented shift, even economists and policymakers are unsure of what to expect. Some believe the crazy money printing that’s gone on in the past year will absolutely cause an extended period of inflation. Others think today’s high prices are simply a temporary reaction to the negative oil prices a year ago and the shift in consumer behaviour. In any case, there’s plenty of scaremongering going on.
The traditional way to combat inflation is to raise interest rates. At the moment interest rates are at record lows, so raising them would curb borrowing and make it expensive for some companies to operate.
I would not be surprised if the S&P 500 experiences a significant correction in the coming months, simply because so many of its growth stocks have achieved unsustainable valuations. This would no doubt be felt in the FTSE 100 too, but I’m not expecting an outright stock market crash any time soon. Of course I don’t have a crystal ball and could easily be wrong.
Maintaining a long-term outlook
I think the great thing about long-term investing is that these intermittent fluctuations really shouldn’t matter. If I shut out the noise and focus on the likelihood of certain companies still being here in five to 10 years’ time, it makes choosing stocks to invest in much easier.
Companies I like for that reason are Unilever and Amazon. Unilever’s dividend yield is 3.4%, the price-to-earnings ratio is 23 and earnings per share are 183p. Its share price has risen 38% in the past five years and its wide selection of brands includes popular household names like Hellmann’s, Lynx and Persil.
Meanwhile, Amazon is a cash-rich company with a considerable grasp on consumer shopping habits. I think this will help it continue to thrive during periods of inflation.
