Get ready for a stock market crash

Stephen Wright thinks that interest rates are likely to rise faster than investors are expecting. Here’s how he’s planning for a stock market crash.

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Stack of British pound coins falling on list of share prices

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Key Points

  • In 2022, share prices fell as central banks increased interest rates to tackling inflation
  • Inflation in the UK is still high and is being supported by low unemployment numbers
  • There are a number of UK stocks that could be great investments in a stock market crash

I think a stock market crash in 2023 is a strong possibility. Interest rates, inflation, and employment numbers lead me to believe this. 

As a result, I’m preparing for a sharp decline in share prices. This involves identifying shares that I believe are expensive at the moment, but that I’d like to buy at much lower prices.

Interest rates

Rising interest rates were the main reason that 2022 was a down year for the stock market. Share prices fell as bonds and cash began to offer progressively more attractive returns.

There were a number of rallies, though, as investors speculated that central banks might decide to slow or even reverse interest rate increases. When this didn’t happen, stocks fell again.

It seems to me that the market is still overly optimistic about the future of interest rates. I think that central banks are unlikely to be so accommodating and that this might well cause a stock market crash.

Inflation

The reason that central banks were raising interest rates in 2022 was high inflation. Both the Bank of England in the UK and the Federal Reserve in the US are targeting 2% inflation.

Falling inflation on both sides of the Atlantic has been fuelling investor optimistm about interest rates. But I think this is premature. 

In the UK, the most recent inflation reading came in at 10.1%. While that is down from a high of 11%, it’s still a very long way from the 2% target.

On top of that, food and fuel prices aren’t showing much sign of coming down. As a result, I think that interest rates are likely to keep increasing, which could push share prices down.

Unemployment

Macroeconomic data in the UK indicates that unemployment rates are low. And that’s likely to be a headwind for the project of bringing down inflation.

Unless and until something happens in the job market, I think that central banks are going to struggle to control rising prices, aside from any other global issues.

That makes me think inflation is going to be difficult to bring down, which could cause interest rates to rise further. That’s another reason to be ready for a stock market crash.

Stocks to buy

For me, preparing for a stock market crash involves identifying shares that I’d like to own, but I’m not willing to buy at today’s prices. Two UK stocks stand out to me.

The first is Halma. The company is a collection of businesses focused on industrial safety, environmental monitoring, and life sciences.

Halma’s subsidiaries occupy dominant positions in niche markets, making it hard for competitors to disrupt them. This gives the company a steady source of cash with scope for growth.

The second is Experian — a credit bureau that provides an essential service for banks in their lending. It also has low operating costs, which allow it to maintain significant operating margins.

Experian’s business is protected by a huge database that it would be virtually impossible for a competitor to copy. As a result, I think it’s a great stock to own for the long term.

Both Halma and Experian are FTSE 100 stocks that I sold recently, because I think there’s better value available elsewhere. Their high prices remain a risk. But in a stock market crash, I’d probably think otherwise.

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.

Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Experian Plc and Halma Plc. 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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