3 reasons why this might not be the beginning of a stock market crash

Jon Smith considers how the current situation is different from the stock market crash last year, but notes the uncertainty of potential events ahead.

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.

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Stock markets around the world fell on Friday as concern grew around the new Covid-19 variant, known as B.1.1.529. The FTSE 100 opened down 3%, with oil also falling around 5% and other asset classes following suit. Within the stock market, airlines and tourism shares were among the hardest hit. But is this necessarily the start of another stock market crash? 

It’s not the same as 2020

The first reason why I think it isn’t the start of something like the crash in 2020 is the advancements made since then. The stock market crash of 2020 was serious because there wasn’t a readily available vaccine to stop the virus. At that time, we didn’t even know when the majority of the population would be vaccinated. So for large corporates in the FTSE 100, there was a huge amount of unknowns about how to operate.

The new variant does present a threat. Yet it’s not confirmed if the vaccines that we have are rendered useless, or to what extent efficacy is reduced. From this, economies are in a better position as existing vaccines can still be tweaked.

Further, a lot of businesses and consumers are now aware of how to operate with restrictions. This will make it easier to go back to certain measures if needed. Therefore, the situation isn’t as serious as it was when the first Covid-19 stock market crash happened.

Government keen to stay open

The second reason why I’m not seriously concerned right now is the stance from the UK government. The Prime Minister and other cabinet members have made it clear so far that the prospect of another national lockdown is very slim. From an economic point of view, one of the most damaging things for many FTSE 100 stocks would be another lockdown.

Clearly, this situation could change very quickly. But in terms of assessing whether we’re imminently going to see a stock market crash, I think the lack of desire for a UK lockdown helps.

This reason can be flipped to a risk though. The government has gone back on policy decisions before, so a sudden shift towards restrictions could be a catalyst for a steep fall in markets.

Another market crash versus valuations

Finally, I think the fundamental value of many stocks within the FTSE 100 already price in a level of uncertainty. From recent Q3 results, one message I noted from many companies was that although they are seeing better growth, 2022 is still an unknown. These companies have factored in the unpredictability of Covid-19. 

Now I accept that the share price doesn’t always accurately reflect the business fundamentals, but there aren’t a host of FTSE 100 stocks that look massively overvalued right now.

I can use this final point to my advantage. Even after the slump in markets yesterday, there are some attractive stocks that have seen a hit. If I can make a case for it looking undervalued, I could look to buy.

Ultimately, these are just my personal opinions. The picture is changing very quickly, with my points potentially becoming invalid in months to come. Yet for the moment, I think the above are relevant points regarding the chatter of another stock market crash.

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.

Jon Smith and The Motley Fool UK have 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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