I’m surprised that the Russian invasion of Ukraine did not trigger a stock market crash. There was only a brief FTSE 100 dip, which has already been reversed. And we’re still looking at a 10% rise over the past 12 months.
Saying that, the FTSE 250 has been on a slide since the start of 2022. So are smaller-cap investors leading the way down, and will London’s bigger index follow suit? Here are three things I think could send the stock market tumbling
Interest rate rises
Inflation and interest rates are both climbing. Central banks don’t want to dent any hopes of a post-pandemic economic recovery, so base rates have ticked up relatively conservatively.
But further rises should make other forms of investment look increasingly attractive, and could draw money away from the stock market. The five-year US Treasury yield, for example, is approaching 3%, which is attractive and very safe.
If inflation makes investors more nervous, we could see a move to safety in the coming months. All it might take is a shift in asset allocation by institutional investors, and we could face a bear market.
Stock market overvaluation
But FTSE 100 share prices have had a weak decade. And the lead index looks set for a 4% dividend yield this year. That means the stock market must be undervalued, surely? Well, I’ve been checking on various P/E estimates for stock market indices.
Right now, on a trailing 12-month basis, the FTSE 100 P/E stands at about 15.1. At the end of December 2019, just before the Covid-19 pandemic struck, it was around 16.3.
Is that very small fall in the value of UK stocks sufficient to cover the effects of the pandemic, the Ukraine war, and the havoc of soaring fuel prices? Maybe the stock market isn’t as cheap as it first seems.
Commodities fall
Some of today’s biggest FTSE 100 dividend yields come from miners. Rio Tinto, for example, is on a forecast yield of 10%. That is all on the back of rising commodities prices. Prices for iron ore and copper, for example, have almost doubled over the past five years. But have we reached the peak of the current cycle?
If demand should start to fall, mining dividends and share prices could drop. And that could add another knock-on effect to the stock market overall. Is it likely to happen? Soaring inflation and geopolitical upheaval are things that do tend to hit demand.
What should I do?
I know what I’m not going to do — I’m not going to panic and sell any shares. I’ve heard suggestions that analysts have predicted at least 10 of the last five stock market crashes. And even the ones they got right haven’t lasted for long.
I’ll keep on looking for shares in great companies at what I consider fair prices. And every time I have enough spare cash, I’ll buy. And if we get a crash, I’ll buy at even cheaper prices.
