A stock market crash is more than just a fall in share prices. Rather, it is a fairly sudden correction on a large scale.
One definition is that for a market decline to be seen as a crash, it needs to be over 20%. Between February and May last year, the tech-heavy US Nasdaq index fell 27%. That was a crash – and threw up some great buying opportunities.
Indeed, as a long-term investor, I see a market crash as a potential opportunity to buy into great blue-chip companies when their shares look unreasonably cheap, compared to their business prospects. Could 2023 present me with such an opportunity?
Turbulence ahead
Increasingly, I think it may. So far this year the FTSE 100 index is flat. It is 5% higher than where it stood a year ago. But there is a lot of uncertainty right now that I think could play havoc with at least some share valuations. A huge bank failure in the US last week caused panic on Wall Street.
The US government has promised to ensure depositors will not suffer. That dramatic intervention could ultimately lead to all sorts of unforeseen consequences. Large investors are wargaming those consequences right now while watching closely to see whether bank customers are reassured — or keep withdrawing their savings.
I think the US regulatory moves may have averted possible chaos on Wall Street yesterday. But it remains to be seen whether there are further bank runs in the near future. History tells us that bank runs can snowball quickly and ripple through the wider financial infrastructure. There could be more stock market volatility to come in the next few weeks and months. If the US stock market tumbles, I expect knock-on effects in other markets.
Prepare now to act later
Whatever happens, I am getting my ducks in a row now. Specifically I am updating my shopping list of companies I think have excellent long-term prospects but that have been too pricy for my tastes.
I already picked some names off the list by purchasing them as their prices fell over the past few months, such as Alphabet. But others remain on my list, from Guinness brewer Diageo to vet medicine maker Dechra Pharmaceuticals.
Whenever the next stock market crash is — which nobody knows — I expect some shares will fall further than others. In some cases, price falls reflect a company’s worsening underlying business prospects. For example, if there is a bank run and banking shares tank, investors may fear that some banks may go under and shareholders could be wiped out. Any share that falls in price can always fall further, until it hits zero.
But in other cases, shares in great companies may suffer as part of a widespread market rout, even though their specific business prospects look broadly unchanged.
Such bargains often do not hang around for long. So rather than spending time trying to predict the next stock market crash, I am making sure I am ready for it. By identifying brilliant companies now, hopefully I can use a future crash to buy their shares at bargain prices — and build my wealth.
