Some people have been vocal recently about the fact that the current stock market rally doesn’t seem to be reflecting the actual state of the UK economy. This comes after we recently hit fresh record highs on the FTSE 100. So to address if there’s the case for a looming stock market crash, I turned to artificial intelligence (AI) for an answer, asking ChatGPT if a fall was indeed coming. Here’s what it said!
Reasons for concern
It started off by telling me that predicting a stock market crash is inherently uncertain. This is correct, as no one (not even AI) can predict the future. However, it then went on to explain why there could be vulnerabilities in the market due to several factors.
It flagged the impact of an economic slowdown. This could be made worse due to interest rates staying higher for longer this year. Many of us (myself included) thought the base rate would fall quickly in the first half of this year. Yet expectations have changed significantly, mostly due to concerns that the battle with inflation might not be over. ChatGPT noted that persistently high inflation has eroded disposable income, which is negatively impacting sectors that are reliant on consumer demand.
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A good point made was on the global influences to the market. Escalating conflicts or trade tensions could disrupt markets and trigger risk aversion among investors. With the new US President threatening (and already implementing) tariffs, there could be disruption for companies, even the ones listed in the UK. Let’s also not forget that the UK market often follows the US market. Recent fears about AI becoming a bubble could cause American stocks to fall, having a knock-on impact to Britain.
Targeting value
Despite these concerns raised, investors can still find some opportunities via buying value stocks. If a stock’s cheap now, it could be less impacted if a crash comes, given the existing valuation. For example, a stock for consideration is Rio Tinto (LSE:RIO). The global commodity giant has a price-to-earnings ratio of 8.57. This is below the fair value benchmark figure of 10 I use, potentially indicating it’s cheap right now.
The share price has fallen 9% over the last year. Declining iron ore and copper prices haven’t helped, as the business ultimately is selling the produce for less now than a year back. This remains a risk going forward. Natural disasters were another factor, with a cyclone causing significant flooding and damage at Rio Tinto’s facility in Australia.
However, green shoots emerging from China should help the stock going forward. The country’s a large consumer of iron ore, so an economic bump could see a surge in demand. There’s also rumours of a merger deal with Glencore. Although nothing’s been confirmed, this would create a powerhouse commodity player, something which I expect would send the share price higher.
Nothing’s certain
ChatGPT concluded by saying that although it sees risks that could trigger a downturn, a crash isn’t inevitable. I agree. When navigating uncertainty, I’ll keep investing and ensure I keep the right long-term investment perspective.
