With the FTSE 100 trading above 9,000 points and pushing to fresh record highs, it’s no wonder that many investors are cheering. Yet, when I examine the current macroeconomic backdrop, I can identify several warning signs that could lead to a stock market crash later this year. Here are some of them, and why I’m not actually worried.
Inflation trending higher
The latest UK inflation figure showed prices rising by 3.6%, the highest level in well over a year. When I look at the previous months, it’s clear that inflation’s trending higher. This isn’t a good sign, especially when it coincides with weak GDP growth. In effect, we could be heading towards stagflation where an economy has low (or no) growth and rising prices. It’s not a good mix!
The implications of this aren’t great for a rising stock market. The Bank of England committee could be forced to cuts interest rates, which boosts inflation but hurts corporate profit margins. Or it may decide to raise rates to control inflation, but that risks worsening the slowdown and increasing the cost of debt for businesses.
Yet whatever happens, I’ll carry on buying shares. I can always find FTSE stocks that are insulated from this impact. For example, I can target companies with low debt levels, as well as firms that have high operating profit margins and are able to absorb any inflationary impact.
Fiscal worries
Another cause for concern is the government’s fiscal policy. It looks likely that in the Autumn Statement from Chancellor Reeves, there will have to be either cuts to spending or increases in taxation to help balance the books.
Higher taxes would directly impact companies if the Corporation Tax rate rises.And if personal taxes increased, that could act to reduce disposable income and lower demand for products and services.
Again, I can mitigate this potential risk by adding stocks with a global consumer base. Even if UK consumers cut back on spending, this can be offset by increased spending in other areas of the world with lower tax rates.
Getting prepared
So which stocks am I eyeing in a potential market crash? I have a wtach.ist of likely bargains and one stock on that list is RELX (LSE:REL). The company provides data, analytics, and decision tools across legal, scientific, and business sectors. Over the past year, the stock is up 10%.
I believe it can remain resilient in the face of market turmoil for several reasons. The data and analytics provided are high-margin, subscription-based services with relatively low exposure to input costs. So even if inflation really moves higher, the company shouldn’t be seriously impacted.
It also has minimal reliance on any government funding. Its clients are mainly commercial and institutional. So if there’s a crackdown on grants and subsidies from the government later this year, RELX won’t be bothered.
A market crash could cause most stocks to fall due to weak sentiment and snapping up some RELX shares will be a priority for me. Currently, the price-to-earnings ratio stands at 32. This is almost double the FTSE 100 average, so I’d argue it’s a little expensive currently. A move lower would provide a long-term investor like me a much better entry level at a better valuation.
