Will the stock market crash in May? Here’s what the charts say

UK shares have enjoyed a strong 2024 so far, but should investors start bracing for a stock market crash this month? Charlie Carman gives his take.

| More on:
Stack of British pound coins falling on list of share prices

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Enduring a stock market crash is every investor’s worst nightmare. Unfortunately, it’s something long-term buy-and-hold shareholders will experience sooner or later. But, could it be this month?

May usually brings new predictions about plunging share prices. “Sell in May and go away” remains a popular maxim as we enter a period of historical underperformance for stocks.

Let’s examine some risks facing the stock market today.

Marching higher

Context is important. British stocks are doing well right now.

The FTSE 100 index has reached new record highs in recent days.

The FTSE 250 trades below its all-time high, but it’s also enjoying an uptrend this year.

As we climb the so-called ‘wall of worry’, I expect calls for an imminent crash will grow louder.

However, avoiding stock market exposure altogether can mean sacrificing important gains, as recent months have shown.

Interest rates

One major factor to monitor is interest rates. Lower rates generally boost stocks as borrowing costs fall.

The Bank of England will announce its latest monetary policy decision next week. We’re getting mixed clues from the bond market about what to expect. There’s often an inverse relationship between anticipated interest rate changes and gilt prices.

Source: TradingView

Hopes for rate cuts have faded in 2024, evidenced by sinking gilts. Nonetheless, yields haven’t eclipsed last year’s levels yet, suggesting there’s still some optimism for looser policy.

Bank of England policy-makers appear increasingly divided about how hawkish to be on inflation. Investors may find crucial clues about the stock market’s future direction in May’s decision and accompanying guidance.

It’s the economy, stupid…or is it?

Another risk is the fundamental health of the UK economy.

We’re awaiting confirmation that Britain will successfully exit recession. The signs are good, but hardly great. GDP growth was 0.1% in February.

However, bankruptcies are approaching a two-decade high, just below levels last seen in the 2008 financial crisis.

Source: TradingView

Additionally, the OECD predicts Britain will be the worst-performing G7 economy in 2025. Grim stuff.

Yet, this doesn’t necessarily spell trouble for the stock market. Around 75% of FTSE 100 earnings come from overseas. For the FTSE 250, it’s roughly 57%.

How dependent FTSE companies are on the UK economy is a moot point. That said, I’m reminded of the well-worn phrase: “the stock market’s not the economy”.

A stock to consider

For investors worried about a crash, buying defensive stocks could be attractive.

British American Tobacco (LSE:BATS) is one worth considering, in my view.

With a forward price-to-earnings (P/E) ratio under seven, it’s one of the cheaper FTSE 100 stocks. Plus, given the addictive nature of nicotine products, demand remains fairly constant throughout the economic cycle.

Admittedly, the company faces significant, arguably existential, risks. Government regulations on tobacco products and electronic cigarettes are becoming increasingly stringent around the world.

Nevertheless, British American Tobacco’s confident it can reach 50m consumers for its non-combustible products by 2030. This is probably the company’s best shot at future growth, although traditional cigarettes remain highly cash-generative for now.

Overall, I believe recession-resistant qualities, a rock bottom valuation, and a chunky 9.8% dividend yield are enough to compensate for the risks. I reckon this business stands a good chance of outperforming if the stock market crashes.

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.

Charlie Carman has positions in British American Tobacco P.l.c. The Motley Fool UK has recommended British American Tobacco P.l.c. 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.

More on Investing Articles

Investing Articles

1 superb growth stock that could be a massive winner, with help from AI

Our writer looks at one high-quality growth stock that might benefit tremendously over time from advances in artificial intelligence.

Read more »

2024 year number handwritten on a sandy beach at sunrise
Investing Articles

2 ultra-high-yield UK stocks paying me passive income

This writer highlights two high-quality FTSE 100 dividend stocks offering very lucrative passive income opportunities right now.

Read more »

Asian man looking concerned while studying paperwork at his desk in an office
Investing Articles

Should I increase my stake in Legal & General or buy great value Aviva shares instead?

Aviva shares have had a strong year, which is bad news for Harvey Jones who bought FTSE 100 rival Legal…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

If I’d bought Lloyds shares a year ago, here’s what I’d have now

It looks like the value of my long-held Lloyds shares is moving me into profit in 2024. Are the UK's…

Read more »

Investing Articles

Here’s how I’d target a £5,900 second income by investing £50 a week

We don't need a huge pile of cash to earn a second income. Here's one way I'd aim for it…

Read more »

Grey cat peeking out from inside a cardboard box in a house
Investing Articles

Recently released: May’s small-cap stock recommendation [PREMIUM PICKS]

We believe the UK small-cap market offers a myriad of opportunities across a wide range of different businesses and industries.

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

I’m listening to Warren Buffett and buying bargain shares!

Our writer has been taking lessons from the investing career of Warren Buffett. Here's how he's using it to try…

Read more »

Close-up of British bank notes
Investing Articles

Here’s how I’d spend £6,900 on income shares to try and earn £500 per year

Christopher Ruane outlines some of the investment principles he'd apply when trying to earn £500 of dividends annually by spending…

Read more »