Last week, stock markets around the world were spooked by deteriorating economic data across the globe. This wasn’t exactly a stock market crash, but it brought back memories of last year.
Equity markets around the world plunged when the pandemic began as it became clear it would have a significant impact on jobs and wages.
It seems unlikely we’ll see a crash of the same magnitude in the next few months. However, anything’s possible when it comes to the stock market.
Bounce-back
Equity markets have been on a tear throughout the pandemic. The S&P 500, the leading stock index in the US, has more than doubled in value from its March 2020 stock market crash low. The FTSE All-Share index has returned 45%.
It seems to me that some of this performance reflects economic growth. It also appears that equity markets were too pessimistic in their initial interpretation of how much of an impact the pandemic would have on specific companies. Equity prices have recovered as investors have reassessed the situation.
Some of the gains also seem to have been driven by central bank quantitative easing. With interest rates held at record low levels, investors and savers worldwide have plunged their cash into stock markets open for better returns.
The question is, what happens next? The pandemic is still raging around the world, but economies have bounced back. Central banks are now talking about starting to withdraw stimulus from the market.
Withdrawing stimulus too fast could negatively impact the market and potentially causes a stock market crash. That’s precisely what happened in 2013 in an event that has become known as the Taper Tantrum.
Another risk is that economic growth doesn’t live up to expectations. Lower growth would justify lower valuations for equities. Further, if another more deadly coronavirus variant emerges, the economic bounce back and may shudder to a halt.
Stock market crash protection
These are the factors that could lead to a market crash in the next few weeks and months.
However, here at The Motley Fool, we’re not interested in trying to time short-term market movements. We’re looking to buy high-quality companies to hold for the long run.
This is the approach I plan to continue using, even if there is another stock market crash.
I’ll continue to focus on finding high-quality companies and defensive investments, such as drinks giant Diageo. Even if the stock market crashes 50% tomorrow, I don’t think people will stop drinking whiskey, vodka and Guinness. Although if the economic recovery stutters, the firm’s sales may decline.
All in all, I think there’s a chance we may see a stock market crash in the next few weeks. Any of the reasons outlined above could send markets lurching lower.
Nonetheless, I’m not going to deviate from my strategy of buying and holding high-quality companies.
