Last summer, there was a lot of concern that the stock market crash seen from March could return. As the UK went back into lockdown over the winter, this concern had been on my mind for a long time. However, the remarkable resilience of the companies that make up the FTSE 100 and the investor sentiment has been impressive. As a result, I actually think that we could now be looking forward to a stock market boom, not a crash.
Bouncing back from the pandemic
The first reason for this thinking is the surprise factor. There is a famous expression that bull markets don’t die of old age. In essence, a rising stock market won’t crash simply because it’s been rising for a long period. It needs a catalyst to cause the crash. Clearly, the pandemic was a serious issue that warranted concern with the crash last year.
However, the concern around the pandemic has now been tempered. It’s still an issue for many companies, but it’s something that most have learnt to live with. With that being the case, I don’t see the stock market being riled by Covid-19 in the same way it was during the crash. If we don’t see a crash, then the opposite is that the market should rally instead as part of a longer-term boom cycle.
The economic cycle is the second reason why I think we could have a stock market boom. Economic theory suggests that we go through cycles of peaks and troughs of activity. The UK went into a recession last year with two consecutive periods of negative GDP growth. This was the trough. Following this, a recovery happens (which is what I think we are going through now). After the recovery, comes the boom.
The recovery might take longer than I think, but the economic cycle has been proven over a long period. Yet during both the recovery and the boom period, the stock market should be well supported.
A stock market boom based on improving results
The third sign I’m noting is a similar theme of good half-year results coming out. Various FTSE 100 companies have reported these over the past month. With some exceptions, these are all very positive.
For example, Lloyds Banking Group is a company that sees its share price closely track investor sentiment for the UK economy. In the recent half-year results, statutory profit before tax came in at £3.9bn versus a loss of £602m in the same period last year.
This shows to me that any stock market boom from here is built on solid fundamentals. The fundamental value coming from improving financials results from the businesses within the index.
Although I’m positive overall about things, it would be unwise not to contemplate the risks. Clearly, variants of the virus could pose a threat that is unknown at present. The long-term protection offered by the vaccine is also unknown. Both could mean that the economy gets stuck in a sluggish recovery or simply treading water.
Overall, I think that the positive signs outweigh the red flags for the UK stock market.
