Last week I wrote about the potential for a stock market crash. It was one of most popular articles I’ve written for The Motley Fool, which suggests that many readers are as concerned about a potential crash as I am. However, I think there’s also a case to be made for a longer bull market.
Stock market crash?
A stock market crash is a rapid drop in share prices across all market sectors. They are generally due to the collapse of a speculative bubble, an economic crisis, or a catastrophic event. As share prices lower, investors panic sell their shares, creating a negative feedback loop of share price falls.
But crashes mean there are opportunities to buy good stocks cheaply. And investors who drip feed cash into the market at regular intervals are unlikely to be badly stung.
My perspective is that the risk of a crash is high as the delta variant, together with the new Chinese stock exchange, and the labour shortage, may have the potential to hit the global economy. And if the economic recovery weakens, share prices could fall and the negative feedback loop could begin. But there are also plenty of reasons to be optimistic.
My bull market thesis
I think many investors worry too much about timing the market correctly. Even including crashes, the stock market has always risen in the long run. If I had invested all of my money into a FTSE 100 tracker just before the 2008 financial crash, I’d still be in profit if I’d simply held the stocks. And if I’d bought a house in 2007, its value would have fallen 16% in 2008. But I’d still be up 30% by now if I hadn’t sold.
The FTSE 100 was at 6,026 points a year ago, and has now risen 17% to 7,045 points. If I’d invested £1,000 in a FTSE 100 tracker a year ago, I’d have £1,170. The earlier I invest, the larger my financial cushion becomes for when a crash happens.
And the Bank of England is holding the base interest rate at 0.1%, believing that inflationary fears are “transitory.” Central banks might feel compelled to keep injecting liquidity into the global economy to prevent the very crash I’m worried about.
The bull market could easily continue. Vaccinations may contain the feared winter surge of coronavirus cases. And with £200bn of extra forced savings accumulated in UK bank accounts since 2019, there may even be a spending splurge at Christmas that forces share prices even higher.
The crash that never happened
The ‘taper tantrum’ in 2013 caused panic when the US Federal Reserve reduced quantitative easing. But the expected crash never happened. Many investors missed out on years of stock market growth. By trying to avoid a downturn by timing the market, they cost themselves dearly. Similarly, investors who sold during the fall in March 2020 likely also lost out on the bull market that followed.
A stock market crash is all but guaranteed between now and when I’m set to retire in 2058. I may be a Motley Fool, but I’m not foolish enough to pretend dips won’t happen between now and then.
But I’m a long-term investor. Stocks like Facebook, Apple, Amazon, and Google aren’t going anywhere. I’ll invest with confidence in this bull market and ride out the correction when it comes.
