The FTSE 100 touched 7,600 this month, a first since the Covid-19 crisis happened. Growth prospects for the UK look good, as do dividend forecasts. So why am I talking about a stock market crash here?
That is because as an investor I like to be prepared for every possible outcome. There is no denying that things could go really well. But it is also true that they could go south in a heartbeat. I mean, just think back to two years ago. At this time in 2020, we had absolutely no clue what was going to hit us. If we had any inkling, perhaps we could have been better prepared. Or even better, we could have made the most of the stock market crash that ensued.
Covid-19 returns
And right now, there are still a number of risks on the horizon. Including that of a potential resurgence of the pandemic. There is no denying that we have come a very long way from two years ago. But the emergence of new variants leaves me wondering if we are indeed at the end of this tunnel or not. In fact, even if the threat itself is not big, it could well have a sentimental impact on the stock markets. We saw that when the Omicron variant was discovered in late November last year. The wobble to the markets did last for a few weeks. Who is to say that we might not have a full-blown crash again if another variant is discovered?
High inflation could stay
Also, inflation is pretty damn worrisome. Just this morning I woke up to a Financial Times article that quotes Nicolai Tangen, the CEO of the world’s largest sovereign wealth fund, who has a grim view on inflation. He says that returns to stock markets could be impacted for the next few years because of high price increases. And indeed, inflation numbers are already quite high. In the UK, we have seen two months of 5%+ inflation and it is expected to stay in the foreseeable future too. While there are still some economists who believe that high inflation is transitory, I think we should not take it for granted. Especially not at a time when there is speculation that the oil price could rise to $150 a barrel.
Higher interest rates could be bad news
High inflation has accelerated the start of an interest rate hike cycle already. While this is good for the likes of banking stocks right now, the core purpose of any rate hike is to slow down demand, which cannot be good for FTSE-listed companies in the short term. This is particularly so right now, when many companies have taken on a whole lot of debt during the pandemic.
What I’d do in a stock market crash
The important question though, is this. What needs to be done if there is indeed a stock market crash? The purpose of this article is not to create panic, but to illustrate that a crash might be coming. Like the previous one it is also an opportunity to invest, not to run for the hills. That is what I am doing now.
