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3 reasons why I don’t think this is the beginning of a serious stock market crash

With extensive news coverage and some headline-grabbing financial commentators, there is an argument to be made that the coronavirus and the impact of it could push the UK into a recession. Not only this, but some are forecasting a full-blown stock market crash, beyond the fall we have seen over the past few weeks.

A crash does not have a specific percentage fall attached to it. But usually a 10% drop is seen as a correction, whereas a 25% drop is seen as a crash. The timing also changes the definition. If an index loses 25% over 10 years it would not be termed a crash. But if it fell by that amount in a month then it certainly would be!

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Regardless of how you define a crash, it is bad news for investors. It means the share price value of your portfolio would drop significantly. But here are three reasons why I do not think 2020 will be the year of a full stock market crash.

P/E ratios are not that high

Price-to-earnings ratios show how investors are valuing a company on the basis of potential future earnings. If you are very positive on the future or a firm, you may happily pay 20 or 30 times current earnings to buy the stock.

The FTSE All Share average P/E ratio sits around 13, which is very comfortable and does not suggest the market is seriously overbought. Even before the correction, for most of 2019 the average P/E sat around 16-18. A historically high number has been anything of 20+. This would indicate the market is expensive and could be due a move lower to compensate. 

Interest rates have been cut

Rates are seen as a leading indicator, which means raising or cutting interest rates is seen as a preemptive move to counteract a coming problem for the economy. Yesterday the Bank of England cut interest rates by 0.5%, bringing them down to a low 0.25%. I actually see this as a positive move. This is being done as a protective measure in advance of any serious hit to the economy (and by extension the stock market).

The cut in rates means that companies can borrow funds at a lower rate from the banks. This enables financing for investment or spending in other ways. It should help firms to lower costs. And this should mean a more profitable bottom line (or at least offsetting some of the fall in revenue from the virus disruption).

Good 2019 corporate earnings

A raft of FTSE 100 firms have reported full-year results for 2019 over the past month or so. More often than not they have been positive. For example, I reviewed both Barratt Developments and Admiral Group. I see them as buys due to those good results released recently. Yes, there is potential disruption to be caused by combative measures against the virus. But there are a lot of firms that have strong balance sheet and robust market share. I’m not saying 2020 won’t see earnings take a hit. But firms like these should be in a good position to ride it out. 

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Jonathan Smith does not own shares in any firm mentioned. The Motley Fool UK has recommended Admiral Group. 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.