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4 reasons why I think the probability of another stock market crash is falling

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If I rewind a year, at this point in 2020, the FTSE 100 was just starting to recover from the stock market crash seen in March. In fact, it wasn’t just the FTSE 100, but other stock markets around the world. Back then, the mounting concern around Covid-19 had seen investors collectively sell out of stocks.

The catalysts for a stock market crash vary each time one happens, with some being more predictable than others. However, despite ongoing fears of another, I think the odds of an imminent crash are falling.

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The stock market is in a different place to last year

I don’t think that we’ll see another stock market crash related to Covid-19 this year. I know this is a bold statement. But consider the difference between the crash last year versus now. Last year, there had been no adjustment in expectations for companies in the travel and tourism sectors.

As we stand today, this point has been addressed. The share prices of some airline operators and travel companies are lower, factoring in the negative impact on revenues due to the virus. Others sectors that rely on physical footfall, or simply companies that haven’t adapted, have seen a share price tumble. This natural adjustment means companies are more fairly priced now given what has happened, so shouldn’t need a further crash to adjust further.

Another reason why I think the chances of a stock market crash are receding is due to the accommodative stance taken by governments and central banks. For example, in the UK we’ve seen the furlough scheme, Covid loans and other measures to help businesses. The Bank of England has cut the interest rate down to just 0.1%. 

All of this could allow public listed companies to steady the ship and be ready to bounce back in 2021. Obviously, all of the public sector spending comes at a cost. But I don’t see a stock market crash this year due to a lack of help from the government.

A brighter outlook could see a rally 

The most compelling reason I don’t see a stock market crash this year is due to the vaccine progress. Not only do we now have a vaccine, it’s been taken by more than 30m people in the UK. So the outlook for companies within the FTSE 100 index and others is positive, not negative. 

If anything, I think we will see stocks (and the overall index) rally in 2021 as optimism spreads regarding the UK economy. Easing lockdown restrictions should provide a much needed boost to companies in the sectors that were hardest hit from the stock market crash last year.

Given my above reasons, I’m actually looking to buy some stocks that could capitalise on the optimism for this year. One example is Auto Trader Group, which provides a marketplace for trading cars. The reopening of the economy should see pent-up demand for vehicles released, especially as physical viewings can be arranged.

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jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK has recommended Auto Trader. 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.

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