The US banking crisis appears to have been contained for now, and so far we’ve avoided a full-blown stock market crash. While the FTSE 100 is down around 500 points from its recent all-time high of just over 8,000 in February, that’s a drop of just 6% and doesn’t qualify as a crash.
Regulators acted fast to prevent a repeat of the great financial crisis of 2007/08, but markets remain uneasy. It’s worth remembering that the financial crisis wasn’t done and dusted in a weekend, but took around 18 months for events to unfold.
I’ll buy cheap shares if they crash
I’m not expecting a similar-sized disaster this time round. UK regulators have worked hard to build resilience in our banking sector. Yet I still think 2023 will be bumpy, and a sell-off can’t be ruled out in the weeks ahead.
Monetary policy has gone into a sharp reverse over the last year or so. The era of cheap money is now over, killed off by today’s turbocharged inflation. Interest rates have rocketed from near zero to almost 5% in the US. Until last week’s events, investors were anticipating a peak of at least 6%.
I can’t overstate how big a change this is. Growth companies, notably those in the US tech sector, got used to tapping into an endless stream of cheap venture capital, which they could use to fund their rapid expansion. That is now drying up for three reasons.
1. Borrowing money is now more expensive. Start-ups have to make a better investment case given the added cost of capital.
2. Today’s sky-high inflation rates will reduce the value of growth companies’ future revenues in real terms. This is another reason for investors to be cautious.
3. Yields are rising. Why gamble money on a growth stock when an investor can get 4% a year from a low-risk bond?
Sticky times ahead
Consumer price inflation is proving sticky, particularly in the UK where it was 10.1% in January. It did slip to 6% in the US during February, but core CPI, which excludes volatile food and energy prices, actually rose 0.5% to 6%.
This leaves central bankers between a rock and a hard place. Further interest rate hikes may curb inflation but at a high price. Fighting inflation without triggering a stock market crash may be beyond the US Federal Reserve and Bank of England.
Yet I’m not scared of a stock market crash. Instead, I’m preparing for one. And no, I don’t mean by loading up on tinned food and ammunition, but by building up my cash reserves. That way if share prices do crash, I can take advantage by picking up more of my favourite stocks at reduced prices.
There are loads of top FTSE 100 stocks I’d like to buy right now. BT Group, Legal & General Group and Unilever are high on my shopping list. All three look pretty good value today, but could look even more tempting if shares plunge.
If we do get a stock market crash this year, I’ve got absolutely no intention of wasting it. I’ll be loading up on bargain shares while I can.
