2 reasons why we might be on the verge of another stock market crash

Jonathan Smith runs through a different point of view when looking at some reasons why another stock market crash might be heading his way.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

The FTSE 100 index had a tough time last week. It opened the week just shy of 7,150 points, but closed it teetering around 7,000. In fact, the 7,000 level was broken late in the week, but it managed to close just above it on Friday. Momentum seems to be stalling as since early May, the index has been confined to a tight range between 7,000 and 7,200 points. With this in danger of being broken on the low end, should I be preparing for another stock market crash?

The impact of Covid-19

The last stock market crash came in spring 2020. For many (including myself), that seems an age away. At that time, the cause of the crash was clear. The Covid-19 pandemic was gripping the world, causing economic and life-threatening havoc. The FTSE 100 index fell from levels around 7,400 points in early February to 5,000 points by the middle of March.

There was clearly an obvious catalyst for the fall. Consumer spending dried up, companies couldn’t open physical stores and lockdowns meant travel and tourism ground to a halt. Any company operating in areas apart from essential services or supplies really struggled. As a result, investors sold shares, which caused the index to crash.

Could Covid-19 cause another stock market crash? Potentially yes. The situation with vaccination rates and England’s so-called Freedom Day are very positive in the UK. However, this isn’t the case globally. Countries such as India and Brazil are currently really struggling to stop the surge of the virus. With new variants of the virus being discovered, I wouldn’t rule out the possibility of another stock market crash if a virus mutation that the vaccine doesn’t neutralise starts to hit the UK.

A market crash looming?

Aside from Covid-related issues, there’s also some concern about the strength of the UK recovery. I’m personally in the bullish camp here, as I think the country will continue to outperform for the rest of the year. But some are flagging up recent data releases that could show otherwise. 

For example, after GDP figures bounced back into positive territory in Q3 and Q4 last year, Q1 figures this year showed that the economy shrank again by 1.6%. The latest retail sales data for May also showed a decrease of 1.4%, which takes some of the positivity away from the bumper April figure.

Should data start to tail off then the stock market may drop. It’s a leading indicator, meaning that the stock market looks forward rather than being priced on the past.

Overall, there are signs starting to emerge that could indicate a stock market crash might be coming. However, I struggle to see it occurring without a big catalyst. Markets don’t crash without a big news event. So although I’m noting the above and am being watchful, I’m not overly concerned or changing my investing strategy just yet.

Even if a crash does occur later this year, I can use it to my advantage. Although I’ll see stocks I already hold fall in value, it’ll give me the opportunity to buy new shares at cheaper prices. In the long run, this should work to my advantage.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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