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3 reasons why a stock market crash could happen

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Businessman looking at a red arrow crashing through the floor
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Trends in the FTSE 100 index have been underwhelming in September so far. The index has come dangerously close to falling below the 7,000 mark. Even as I write, it is trading barely above that level. A bunch of reasons can explain why this is potentially the case. And also, why they could trigger another stock market crash. 

Here are three of them.

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#1. The pandemic returns

Coronavirus numbers are beginning to look disturbing to me. As per the latest data, while the number of people infected over last week have thankfully declined, the number of both hospitalisations and deaths are rising. There have even been talks of a possible firebreak lockdown to stem the rise of cases. While the government denies any such plans, I still consider this as a real possibility. And if it happens, it is reasonable to expect that stock markets to tank in the short term. 

#2. Withdrawal of supportive policies

In another article today, I talk of how there is speculation of a housing market crash in the UK. House prices have run up fast in the past year. But now, supportive policies like the stamp duty holiday are being scaled back, which can impact the market adversely. 

Similarly, in the US the Federal Reserve could start withdrawing stimulus by reducing purchases of Treasury securities and increasing interest rates. This could reduce the systemic liquidity that finds its way into financial markets. In China, the government could slow down public investments, slowing down the commodity price bull run.

#3. Weak economic recovery

While the economic recovery so far looks robust, there is no way of saying whether it will continue. The latest numbers for the UK economy show that growth stalled in July, even though all restrictions were eased during the month. In its trading update released earlier today, the FTSE 100 conglomerate Associated British Foods said that the pingdemic impacted the retailer Primark’s sales in the latest quarter as people self-isolated on coming into contact with infected individuals. If this trend continues along with a rise in coronavirus numbers, the recovery may have been overestimated. This could impact the market too.

What I’d do in a stock market crash

There is no way of knowing whether or not a stock market crash will actually happen, but I think the likelihood has risen since the last time I wrote about it. If last year’s crash has taught me anything, it is that the recovery could be very fast as well. 

Many FTSE 100 stocks have run up a lot, including retailers, miners, and property stocks. In a crash, they could be available at discounts that have not been seen since the last crash. It is a good idea to make an investing wish list now, because if such an event does happen, it may not last for long. 

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Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has recommended Associated British Foods. 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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