Is a stock market crash heading our way soon? The signs are there.
The most alarming sign is high interest rates. They’re 5.25% now, which is higher than they have been for 15 years. They may need to go up even further to counteract inflation. Some estimates say 6% might be the peak.
High interest rates don’t guarantee a market crash, but there’s often a strong link. The early 1980s recession was partly due to high inflation and the elevated interest rates that followed.
The reason is that when rates are high, borrowing is expensive. This means businesses invest less, which is bad for the economy. It also reduces consumer spending which impacts stocks and can lead to a recession.
On the cards
Some experts think one might be on the cards too. A recent report from JPMorgan said it expects a “hard landing” in the UK. Whether that comes in the form of a recession, a stock market correction, or crash is hard to say.
If a crash does come, I won’t welcome it, but it could be an opportunity to buy cheap shares. After all, prices will be lower. There might be lots of stocks where I could ‘buy the dip’.
The crash in 2008 was a perfect example of this. Then, the stock market crashed and the FTSE 100 fell 31%. It was the worst year for the index this century. Investors panicked which meant stocks were selling at discounted prices.
It didn’t take long for those prices to look like obvious bargains. The year after, 2009, the market bounced back. The FTSE 100 went up about 22% in a year. It’s still the best year for stocks this century.
Similar crashes came with Covid in 2020 and the dotcom crash in 2000. Each time, the stock market recovered and went on to new highs. Those who bought in at the lows were the biggest winners.
So let’s say a crash is on the way soon, what’s the best way to prepare?
Well, first off, I won’t be selling any of the shares I hold. The stock market is unpredictable and I can’t know for sure when a crash will come. Even the experts have a hard time getting it right. Analysts have predicted 19 of the last three crashes, as the joke goes.
If a crash comes
One thing I can do is to keep cash savings. This is a good idea right now as interest rates mean higher returns from savings accounts. I saw a Cash ISA offering 6.2% last week. That’s higher than most FTSE 100 dividends and is risk-free.
If a crash then comes – a drop of 20% or more, remember – I can use my cash reserves to buy stocks at attractive prices. Hopefully, I’d get market-beating returns by doing this.
It’s not simple to time the bottom though. In fact, it’s near impossible. One way around this is to ‘pound cost average’. Here, I’d drip-feed my cash over several months. This way, if the market falls further, I buy the shares for even cheaper. If the market bounces back, I still get plenty of the benefit.
