Over the past few weeks, the FTSE 100 has been doing well. It hit fresh highs for the year, earlier in November, breaking above the 7,300 level. Despite this, there are still many who believe we’re just around the corner from another stock market crash. If they’re right, then I can actually flip this into a positive by picking up some shares at lower prices as we go into the New Year.
Potential causes of a stock market crash
Before I look at how I can take advantage of a crash, I need to first understand what could be the drivers behind it. In the short run, the fourth Covid-19 wave sweeping through Europe could be one. Austria is now back in lockdown, with the Netherlands putting curfews in place and Germany not ruling out the possibility of restrictions.
If the UK were to impose restrictions in December, then I think the stock market would have a wobble.
Another potential cause for a market crash could be the Bank of England raising interest rates by more than people expect. After surprising many by not raising rates this month, the meeting in December could see the bank raise them. After a large inflation figure of 4.2% came out last week, the Bank might decide it needs a bigger-than-predicted rise to stem higher inflation.
This could be negative for stocks, as higher rates make it more expensive for businesses to service and issue new debt.
How I’d take advantage for 2022
If we see a stock market crash before the end of the year, I’d do a few things. Firstly, I could add to my existing positions. For example, if I bought a stock at 100p and it fell to 80p, I could invest more at the lower level. This reduces my average buying price down to 90p. If I believe that the fundamental outlook for the company hasn’t changed, this could be a good move.
Another way I can use a crash is to buy stocks that I had my eye on but hadn’t committed to yet. For example, there are a few stocks that I think are currently overvalued. I can’t justify investing right now, but if the share price dropped significantly in a short space of time then things would look a lot more attractive.
In terms of risks, the main one I see is that I can never predict how far the market will fall. It’s all too easy to look back on history and claim that I would have bought at the very bottom. In reality, I might buy stocks that continue to fall in the short term. However, as long as I’ve done my homework and am happy with what I’m buying, in the long run the markets should steady and retrace higher.
Overall, a stock market crash may or may not be around the corner. Yet even if it does materialise, I can use it to my advantage to buy good stocks going into 2022.
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Jon Smith and The Motley Fool UK have 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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