3 reasons we could avoid a UK stock market crash

It’s seemed like we might be heading for another stock market crash for months now. Here’s why I think it’s not going to happen.

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The spectre of a new stock market crash has been hanging over the FTSE 100 all year. At best, our economic outlook is uncertain.

But I think the great British public are still optimists at heart. And while we’re shaking our heads about the state of the world, we’re also squirrelling away our spare cash in cheap shares while we can. Well, aren’t we?

Falling inflation

Our hopes of avoiding a fresh stock market crash took a bright turn with the release of August’s inflation figures.

The consumer prices index reached 10.1% in July, and we had 10.2% forecast for August. Various pundits suggested it could hit 14% before starting to ease.

But the August figure came in at 9.9%. In large part, that’s on the back of easing fuel costs. And the government’s plan to cap energy bills over the winter will hopefully soften future inflation a little.

We’re not out of the woods yet, with US inflation doing the opposite and rising higher than expected in August. But don’t those trees look like they’re thinning out a bit in front of us?

Recession? Pah!

A recession could trigger a stock market dip. But how deep a dip and for how long? I’ve never understood why investors are so terrified of the ‘R’ word itself.

If the economy grows by 0.25% per quarter for two consecutive quarters, we hardly expect to see the stock market soar. No, it’s just normality.

But 0.25% falls for two quarters in a row, and we have a recession. Why should the stock market crash? The size and duration of any economic shrinkage will matter. But the bare fact that it’s technically a recession?

The Bank of England says it’s unavoidable anyway. So that uncertainty is lifted, and the expectation is presumably already built into share prices. The confirmation, when it happens, surely shouldn’t make much difference.

Dividends are key

My favourite measure of stock market health is cash. It’s harder to fudge than accounting profits. And when I see actual dividend cash turning up in my account, it definitely soothes any anxiety I might feel.

There are fears that some dividends will be cut, and we’ve already seen mining giants like Rio Tinto paring back their payments. But those are very cyclical anyway, and demand from China has declined. I don’t see the mining sector as indicative of the whole stock market.

I see banks as a better economic reflection, and they’re holding up. I’ve just received my interim dividend from Lloyds Banking Group. Barclays and NatWest Group have both just paid dividends too. And the banks are returning further cash through share buybacks.

No crash here

Plenty of people don’t trust banks so much these days, and after the financial crisis I’m not surprised. But for me, any softening of economic hardship, coupled with a cash-rich financial sector, suggests the chances of a new stock market crash are low.

It’s a bit of a shame, though. I was looking forward to buying more shares in great companies even more cheaply.

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 assessed. Consider taking independent financial advice.

Alan Oscroft has positions in Lloyds Banking Group. The Motley Fool UK has recommended Barclays and Lloyds Banking Group. 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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