On 2 January, the elite UK stock market index broke above 10,000 points for the first time. It’s a big milestone and cements the strong rally it’s been on since the tariff-induced falls back in April last year. Yet despite all the cheers, I think the odds of another stock market crash have risen. Here’s why.
Complacency creeps in
The pop over the past couple of weeks has come more from positive global risk sentiment. Even though this is good, I think the UK stock market is being carried by this, rather than by strong UK-specific factors. In fact, given the state of the economy, I believe some investors are becoming complacent.
The latest GDP figure for Q3 showed anaemic growth of 0.1%. In more recent data, the unemployment rate has risen to 5.1%, the highest level since 2021. There’s also growing chatter about a rise in struggling firms. This fuels worries about underlying economic weakness that could hit corporate earnings.
Yet for the moment, the stock market is being carried higher. This is fuelled in part by rising valuations for AI and tech companies in the US. If we see a correction in this area, it could pull the FTSE 100 lower. At that point, people might start to behave more as if the UK economy isn’t in the best shape, compounding the problems.
Given that the UK data has been deteriorating in recent months, along with the increase in US tech valuations, I think the odds of a crash have risen.
How to handle it
I don’t want to be seen as someone who’s completely doom and gloom. Despite my view that the odds of a big move lower are increasing, I still don’t believe we’re going to see a sharp fall immediately. However, I think it’s worth considering some defensive stocks at the moment to help protect a diversified portfolio.
For example, Associated British Foods (LSE:ABF) is a food company that owns famous brands, including Kingsmill bread and Ovaltine, as well as operating at the beginning of the supply chain via manufacturing and selling raw ingredients.
Over the past year, the share price is up 5%, with a dividend yield of 2.93%. This doesn’t make it a high-growth stock, but it has several qualities that make it a good defensive idea. For example, it generates revenue from multiple divisions, some of which are entirely unrelated to others. Furthermore, it owns brands that sell everyday groceries and staples. People buy these regardless of the economic cycle.
It’s a global company too. So even if the UK underperforms, it can offset any negative impact here from sales around the world.
And of course, we can’t ignore its Primark unit. It’s one of the biggest names in fast fashion and is continuing to expand in the UK, Europe and US.
As a risk, it’s exposed to commodity prices (such as wheat and sugar), which can be very volatile. This can mean that costs of production could increase without much warning. And Primark, while huge, has been rather sluggish of late. Despite this, I think it’s a good stock to consider if someone is worried about the chance of a crash.
