Could we be on the verge of another stock market crash? UK share prices have been under pressure as concerns over inflation have knocked investor confidence. Market makers fear severe policy tightening by central banks to curb runaway price rises. Such a move that could potentially derail the economic recovery.
Fresh notes from the Bank of England’s Financial Policy Committee (oPC) discuss the threat soaring inflation poses to UK share prices. It shows how investors like me need to be prepared for a new stock market crash.
Is a stock market crash approaching?
The FPC said in its latest economic report that “the outlook for the economy remains uncertain.” It added that “the pace of recovery has slowed recently”. And “inflationary pressures have risen”. This poses a danger to financial markets given the strong run on stock markets in recent times.
According to the FPC, “there is evidence that risk-taking remains elevated in a number of markets relative to historic levels”. And this has the potential to cause another stock market crash. The body said “asset valuations could correct sharply if, for example, market participants re-evaluate the prospects for growth, inflation or interest rates”.
The FPC said prices of risky assets increased and valuations leapt to elevated levels as the economic outlook improved following the initial Covid shock. But it added that rising asset prices “may also reflect a ‘search for yield’ and higher risk-taking in a low interest rate environment”.
Will the Fed take action?
Evidence seems to be growing that we’re entering a ‘stagflationary’ environment. That’s a toxic blend of low growth and rampant price rises. Latest non-farm payrolls data from the US, for example, showed just 194,000 new jobs created in August. This was down significantly from the 366,000 jobs created a month earlier.
Yet despite that disappointing non-farm payrolls data, the Federal Reserve still looks poised to taper its quantitative easing programme in the near future. Further rate rises are possible sooner than expected, too, as prices rip higher, heightening the possibility of a stock market crash. The latest consumer price index (or CPI) gauge in the US rose 5.3% year-on-year in August.
This is what I’ll do if markets sink
Clearly the chances of a stock market crash have grown. But I don’t think there’s any reason for panic. Over the long term share, investing has proven to be one of the best ways to make a decent return on one’s cash. That’s even taking into account periods when stock prices have fallen sharply.
This is why I won’t be selling the UK shares I own any time soon. Rather, I’ll use a stock market crash as an opportunity to go bargain hunting. History tells us that great companies with solid fundamentals and strong balance sheets are sold off during crashes along with more vulnerable ones. I’ll be waiting in the wings to hopefully pick these up for a knock down price.
The Bank Of England has acknowledged that inflation is likely to peak above 4%, and stay there until the second quarter of 2022.
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Royston Wild 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.