Whether the recent sell-off in stocks was technically a correction or a stock market crash (or something else) doesn’t really matter. Either way, when the stock market falls sharply as it did, it’s all too easy to make mistakes and lose money. Many investors — myself included — have learnt this the hard way. That’s why I’m looking at whether another crash may come in the months ahead and importantly, at a potential route to weather the storm if it comes.
The main triggers for a stock market crash
Many long-term investors will likely feel that despite low economic growth in the UK over the last decade, with ultra-low interest rates, the stock market has by and large been a good place to be. That’s not the case for everyone of course, but generally speaking, shares have done well relative to other forms of investment.
But does the future look so rosy? The problem with the future is nobody can really predict it with any accuracy. The one thing that can be said at this point is that there are reasons to suspect another stock market crash could occur. I think these mainly relate to inflation, but also to the stretch in valuations of some companies, especially in technology and in the US.
One of the biggest threats, and we’ve seen it clearly already, is persistent inflation. The Bank of England now expects inflation to rise to 7.25% in April — the highest level since summer 1991. That affects interest rates, which tend to then affect shares, especially those with high valuations and promises of future profits — those ‘jam tomorrow’ stocks.
On top of that, there’s the winding down of quantitative easing, which has arguably inflated the price of shares, as it has made borrowing money so cheap since the 2008 financial crisis.
The point is there’s a lot for investors to fret about and if panic sets in after further interest rate rises, there could be another stock market crash.
Other possible triggers
There are two other potential triggers of a stock market crash in the UK. One would be a dramatic fall in the US stock market. The saying goes that when America sneezes the world catches a cold. So if the US economy trips, the UK stock market is sure to be caught up in the malaise.
Also, given its size and the reliance of some of its property companies on debt, there’s a risk that the Chinese economy falters. Once again, given its importance to the global economy and decades of growth, this would send shockwaves through financial markets.
The plan to cope
These are just some of the bigger triggers to watch out for. In any stock market crash, when share prices drop sharply, what I plan is to sit tight and do nothing until the storm blows over. Once it has started, it’s too late for me to start selling my shares, without selling at a loss.
The best move I can make during a crash is to update my watchlist of the shares I like, set price targets for them and be ready to buy more at a lower price when markets settle down.
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Andy Ross owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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