There is always the possibility of a stock market crash, and the threat seems more elevated at the moment. This means that I am already planning the stocks I’d buy if it does happen.
Reasons for another stock market crash
There are several reasons why a stock market crash could be imminent. For example, recent data shows that inflation has risen to 3.2%, significantly higher than the Bank of England’s 2% target. Such high rates of inflation are often bad for stocks. This is because it may prompt the BoE into raising interest rates to get inflation under control. Such a move would make it more expensive for companies to borrow, while investors may also move their money from stocks to a savings account.
There are also fears that the UK economy is slowing down, mainly due to worker shortages and supply chain issues. In fact, in July, the country’s GDP only grew 0.1% despite the removal of the majority of Covid-related measures. The current high number of coronavirus cases may also slow the economy down, especially if a winter lockdown is required. In fact, it’s this prospect of a winter lockdown that I believe could trigger a stock market crash.
Although a stock market crash is by no means something I wish for, I also view it as a great opportunity to buy stocks on the cheap. This means that I’m currently keeping spare cash aside to capitalise on such a pullback. These are the stocks I’ll be especially interested in.
Defensive stocks are those that should continue to provide dividends and stable earnings, no matter the state of the economy. This is because they often provide necessities. As such, when these stocks fall back, I believe it is a great time to buy them on the dip.
My favourite example of a defensive stock is the drinks giant Diageo. With a drinks portfolio of over 200 brands, enjoyed in around 180 different countries, this company clearly has significant consumer loyalty. Throughout the pandemic, it has also generated strong profits. As such, this is a stock I’d snap up more of in the case of another stock market crash.
Supermarkets are also considered essential, and Tesco is my favourite supermarket stock to buy. This is due to its dividend yield of around 4%. Due to consistent earnings, and its essential nature, it is extremely unlikely that this dividend would be cut. Therefore, I’d also add this defensive stock to my portfolio.
Buy stocks when they’re down
In the stock market crash in March 2020, I bought several stocks that were heavily affected by the pandemic, yet also had the balance sheet strength to survive. These included National Express, Barclays, and Aviva. This has proved very successful, as each has managed to make decent recoveries.
As such, in the case of another stock market crash, I’ll use it as an opportunity to buy similar companies on the cheap. It’s imperative that these companies have sufficient balance sheet strength though, otherwise there is the risk of being left with nothing. A few examples that interest me include Bellway and M&G.
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Stuart Blair owns shares in Aviva, Barclays, Diageo and National Express. The Motley Fool UK has recommended Barclays, Diageo, and Tesco. 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.