If you’d told me in late 2021 that Russia would invade Ukraine in early 2022, I’d likely have sold all my shares. I’d have assumed that such a huge geopolitical disaster would trigger a stock market crash. But this has yet to happen in 2022, so far. Even so, here are three red flags I’ve spotted that a stock market correction may eventually turn up. However, an investor, I see any large declines in solid UK companies as an opportunity to buy and hold cheap, beaten-down stocks.
The invasion of Ukraine barely dented share prices
At first, global share prices did head southwards as conflict raged. From 23 February to 7 March, the UK’s FTSE 100 index lost 7.2% of its value. On Monday, it closed down a mere 0.3% from its pre-war closing level. Meanwhile, after initially sliding, the US S&P 500 index stands almost 8% higher than its 23 February close. So Europe’s biggest conflict since 1945 has yet to trigger a stock market crash. To me, this market complacency is quite surprising — and perhaps a little worrying?
Stock market crash: US Treasury yields are soaring
One red flag that grabbed my attention this month is dramatic moves in the US Treasury bond market. On Monday, the 10-year Treasury yield surged to 2.557% a year, before easing back to 2.466%. At end-2021, it hovered around 1.5%. Thus, the yield on this benchmark bond has leapt by almost a full percentage point in early 2022. In historical terms, this is a seismic shift — in the past, it might have hit share prices hard. After all, it reflects expectations for hefty rises in the US Federal Funds Rate from the current 0.25% a year to 2.5% a year from now. With higher interest rates and soaring inflation curbing economic growth, are investors overlooking this bond rout as a possible warning sign of the next recession and/or stock market crash?
China looks shakier
Often, China is referred to as the world’s workshop and its engine of economic growth. But there are signs that all is not well in the Middle Kingdom. The ongoing struggle of giant property developer Evergrande Real Estate Group (SEHK: 3333) to avoid collapse has sent shockwaves throughout China’s property sector. Previously, real estate contributed up to a third of China’s gross domestic product (GDP). With this important market in turmoil, China’s economy looks less solid today. Furthermore, Covid-19 hasn’t gone away, despite global vaccination programmes. As part of its zero-Covid policy, Chinese authorities have locked down 25m people in Shanghai. If this continues beyond the initial nine-day lockdown — or more coronavirus outbreaks hit Chinese cities — this could spell bad news its China’s economy. However, though China sits at the heart of global supply chains, I don’t see its domestic problems spilling over into a full-scale US/UK stock market crash.
Finally, my lazy investment strategy (buy and hold, then do nothing) has worked out well so far in 2022. Indeed, lower share prices have me poised to use our cash pile to buy into quality companies. For me, market dips are not to be feared. I regard them as potential buying opportunities to boost my future returns. That’s why I’m constantly searching for cheap, lowly rated shares with strong earnings and market-beating dividends, especially in the FTSE 100!
