Are we headed for a stock market crash?

This sounds strange right now, I know. I mean, the FTSE 100 index touched its highest levels in two months on Thursday. As I write this Friday afternoon, it is maintaining these levels. 

So why am I talking of a stock market crash?

UK economy shows weak recovery, FTSE 250 stalls

I am basing it on the rising risks to the global recovery, which could pull back companies’ performance and the stock markets.

The UK’s latest growth numbers coming in weak for August was a red flag for me. The economy grew by a mere 0.4% month on month in August even after the lockdowns were eased. Relatedly, the FTSE 250 index, which is roughly representative of how well UK-based companies are doing, stalled last month. This could indicate that its constituent stocks are not growing fast enough to push up the index.  

Weaker numbers expected from across the pond

And it is not just the UK where growth is disappointing. Investment bank Goldman Sachs has just revised its US growth forecasts down as well. It now expects growth in 2022 to slow down from 4.4% to 4%. Economic growth is a reflection of how individual businesses are doing at a collective level. So, expected weakness in the economy means that we can expect weaker company results too. 

The US is the largest economy in the world. So, whatever happens in the US affects the rest of the world too. Now, the latest forecast reduction is hardly panic inducing. But slower growth may be unsustainable for some companies. This can trigger contagion. We saw this in the Chinese context recently. The near-collapse of property developer Evergrande led to stock market tremors around the world. 

Withdrawal of support

I would not rule out more such occurrences, especially as supportive policies are withdrawn. In the UK the furlough scheme has been withdrawn, which could lead to higher unemployment. And the rollback of the stamp duty holiday could be bad news for the housing market. This is particularly because the recovery is too weak to support it. A clutch of property developers’ stocks in the FTSE 100 index held it up nicely over the past year as their share prices rallied on the house price boom. They maybe unable to do so now.

Quantitative easing by central banks in the form of bond purchases may also be reduced. The US Federal Reserve has mentioned this in the context of rising inflation. This could derail whatever recovery has been seen so far. And inflation as such, is a big looming risk right now as well. 

What I would do now

My point is, that keeping in mind that the stock markets were very nervous until recently, I think any news could trigger them into a crash. That does not mean catastrophe, it would probably only be a short-term market dip. Further, I cannot overlook the fact that the FTSE 100 is touching two-month highs now, so the crash may not happen at all. But I would still be prepared for a stock market crash and keep my investing wish list ready to add stocks to my investing portfolio if their prices drop. 

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.