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Is a 2021 stock market crash or rally on the horizon?

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In the US, technology stocks are crashing as US government bonds go through a period of volatility. The reason is the bonds are less attractive because inflation appears to be on the rise. Over the past year, a mixture of hype and hope has sent many tech stocks skyrocketing to valuations that don’t make economic sense in the long run. Many of them are underpinned by low interest rates, and the potential for a rate hike makes investors nervous.

But if interest rates stay low, then companies’ future cash flow predictions could come true. Yet there are signs inflation could be rising. This can cause business running costs to rise and cash flow to become tight.

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Will the FTSE 100 crash?

So, is the UK stock market facing the same predicament? Not really. While the US indices enjoyed an epic rally in 2020, the FTSE 100 was more subdued.

Although calls of a bubble in the US tech sector have been mounting, the same can’t be said of the FTSE 100. It’s still down 13% from its January 2020 highs. That being said, there are a few UK stocks that have reached outsized valuations and may be in line for a correction.

But now that Brexit is ‘done’, the country is preparing for a fresh start. And the vaccine rollout is bringing optimism and hope. So, although it’s unlikely to be plain sailing through 2021, I’ll be surprised if the FTSE 100 index crashes hard.

Of course, there are no guarantees. The pandemic has created a period of intense uncertainty across the globe, and economies are fragile.

As such, I think a long-term investing strategy is a sensible and relatively stress-free way to approach stock picking. The global financial markets will always go through periods of growth and decline. It’s to be expected. Therefore, if I buy shares in companies I truly believe in, I can be confident enough to ignore the peaks and troughs in the market.

Choosing stocks for the long term

When I’m deciding which stocks to buy, I like to consider the bigger picture. What will the world look like in 10 years’ time? I’m not convinced the traditional banking sector will be the same. The rise of Bitcoin and blockchain tech is changing attitudes and there are disruptive developments in fintech. While I can’t claim to know how the future banking landscape will look, I’m not comfortable buying shares in traditional banks like Lloyds and therefore will steer clear.

I think oil, gas and renewables will continue working in harmony for the next decade at least. And I assume mined resources used in battery tech will also remain in demand.

So, is a 2021 stock market crash or rally on the horizon? I think volatility will continue for some time. Some sectors could see a rally, and high valued stocks may correct, but I don’t think there will be an all-out crash. I’m not too worried as I like to invest in strong companies I think will go the distance. By allocating some cash to stocks and funds each month, I can average the amount I’m paying for them over time. With sensible stock picks, I can ignore the volatility and feel fairly confident they’ll increase in value over the long term.  

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Kirsteen owns Bitcoin. The Motley Fool UK has recommended Bitcoin and Lloyds Banking 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.