Is a 1929-style stock market crash imminent?

In recent months, several famous investors have been warning of an imminent stock market crash. Michael Burry, who predicted the housing crash, recently warned of a “mother of all crashes”. Only last month, Jeremy Grantham wrote that US equities are in a “superbubble” with the most “dangerous breadth of asset overpricing in financial history”. So, are investors sleepwalking into a catastrophic loss of wealth? Here’s why I believe the dire predictions have been overdone!

Rampant inflation

In the UK and US, inflation stands at multi-decade highs. A large part of this can be attributed to Covid. However, I believe the problems are more deep-rooted than that. As oil heads toward $100 a barrel, you would expect BP and Shell to be pumping money into exploration projects. Instead, they are divesting themselves of their assets.

Inflationary pressures are not solely being seen in energy. A whole basket of goods is rising. Second hand cars prices have surged 30%. Rent prices are rising at their fastest rate in over a decade. Food prices are rising on the back of increases in agricultural commodities.

We are also starting to see evidence of wage-price inflation. As record numbers of people quit their jobs, vacancies are soaring. Today, most people want to work in technology. The dearth of talent in large swathes of the natural resources sector, further reinforces the inflation thesis.

Interest rate hikes

On its own, inflation will not lead to a stock market crash; but rising interest rates could. The problem is that raising rates by 2% will not extinguish red-hot inflation. But central banks are scared to raise rates too much given the record levels of debt both governments and companies hold.

My fear is that large interest rises may be unavoidable. In such a set-up, tech stocks and particularly software companies would be hit hard. We have already seen what happens when companies fail to meet growth expectations. Meta, Netflix and PayPal provide early warning signs that traders’ confidence is beginning to drain away — but, then, they’re less likely to be looking at the long-term outlook, unlike Foolish investors!

It is also interesting to note that recently the likes of Jeff Bezos, Mark Zuckerberg and Elon Musk have all been offloading shares in their companies.

Where I am investing

As a long-term investor, I don’t fear stock market crashes. But that doesn’t mean I want to risk my hard-earned cash by buying into growth stocks that face uncertain future cash flows.

Whether a stock market crash is due or not, I am putting my money to work in tangible assets. Oil and gas, base and precious metals stocks are all cheap as chips. They have near-term growth potential and are generating huge quantities of free cash flow. If the Covid crash taught me anything, it is that cash is king.

At such a time as this, I remember one of Warren Buffett’s most unknown quotes. Before investing always ensure you have a “margin of safety”. Today, in my opinion, many tech stocks don’t display such a characteristic and I will, therefore, be “fearful when others are greedy”.

Andrew Mackie owns shares in BP and Shell. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Microsoft and PayPal Holdings. 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.