Here’s why a stock market crash could happen

The stock market is doing well right now, but could a crash happen anyway?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The FTSE 100 index has really picked up pace this month. After starting out on an uncertain note, it is now back to pre-pandemic levels. This makes me hopeful that it will go back to the highs of early 2020 before the end of the year. At the same time, I am cognisant of rising risks to the stock market that may well result in a crash. 

UK’s weak recovery could trigger a stock market crash

The fact is the latest rise in the stock market is still not built on a solid foundation. The recovery is still weak. Consider just the UK. In August, the economy grew by a mere 0.4% month on month. This is despite the fact that it was the first month after the lockdowns were completely eased. 

While many FTSE 100 stocks represent multinational companies, some of them are still largely oriented towards the UK market. These include grocers like Tesco, Sainsbury’s, or Morrisons and non-essential retailers like Next. Stocks like these can suffer if the recovery is weak, because it will also reduce the growth rate of consumption demand in the economy. And this in turn can tell on their share prices. 

Should you invest £1,000 in Wise Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Wise Plc made the list?

See the 6 stocks

Commodities’ dwindling gains

Next, consider the China factor. China, the second biggest country economy, is facing its own challenges, as evident from the Evergrande situation, which caused some serious stock market scares around the world. But before this, largely because of the country’s government stimulus, FTSE 100 commodity stocks were flying high. Industrial metal miners like Anglo American, Evraz, Rio Tinto, BHP, and Glencore saw massive share price increases. And they are even among the biggest dividend yielders around. 

However, in recent months stocks like Anglo American and Rio Tinto have seen a sharp drop in price as the outlook for industrial metals is no longer as bullish. They companies also have individual issues. Evraz is facing higher taxes in Russia, while BHP is getting delisted, and Rio Tinto is under scrutiny after it allegedly failed to disclose cost escalation on one of its projects in time to investors. This means that these stocks may remain weak for the rest of the year. 

FTSE 100 companies’ inflation challenge

At the same time, prices are rising. In the UK, inflation has come in above 3% for the last two readings. FTSE 100 companies like Mondi and International Consolidated Airlines among a host of others have flagged inflation as a risk in the past. And looking at the latest numbers, it appears that the situation may only have worsened for many of them. The authorities are of the view that inflationary pressure is transitory. But, if in the meantime it does spike significantly, a stock market dip is possible. And if bearishness is sustained, there could be a full-blown crash as well. 

The other side

There are arguments on the other side too. The recovery could pick up pace any time, more and more sectors are normalising — which can positively impact the FTSE 100 index — and the pandemic is significantly under control now. I hope that is the case. But even in the case of a market crash, I will be ready to buy from among the long list of stocks on my investing wishlist. 

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Manika Premsingh owns shares of Anglo American, Evraz, Glencore, International Consolidated Airlines Group and Rio Tinto. The Motley Fool UK has recommended Morrisons and Tesco. 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.

More on Investing Articles

Investing Articles

If an investor put £10k into Greggs shares one month ago, here’s what they’d have today

Greggs shares have had a tough year but Harvey Jones says they're notably cheaper as a result, while the dividend…

Read more »

Young brown woman delighted with what she sees on her screen
Investing Articles

The Phoenix share price jumps 7.5% on today’s results, but still yields a stunning 9.4%!

Harvey Jones put his faith in the Phoenix share price and this morning was rewarded with a 7.5% jump on…

Read more »

Investing Articles

What’s been going on with the Barclays share price?

The rising Barclays share price reflects confidence in management’s strategy to improve business performance and enhance shareholder returns.

Read more »

Investing Articles

Prediction: in 1 year, the IAG share price could reach as high as…

The IAG share price has almost doubled in the last 12 months, but can this momentum continue in 2025? Zaven…

Read more »

Investing Articles

Prediction: in 12 months, here’s where the Glencore share price could be…

The performance of Glencore’s share price has been lacklustre, to say the least. But could all that change over the…

Read more »

Investing Articles

See how much an investor needs in their ISA to earn a £499 monthly second income

Harvey Jones crunches the numbers to show how it's possible to build a long-term second income by investing in a…

Read more »

Investing Articles

I’m considering buying more of this struggling FTSE 100 stock

This FTSE 100 stock hasn't exactly set our writer's portfolio on fire during the time he's owned it. But Paul…

Read more »

a couple embrace in front of their new home
Investing Articles

Prediction: in 1 year, the Taylor Wimpey share price could reach…

Can Britain’s reformed planning scheme send the Taylor Wimpey share price into overdrive? Here’s what the latest analyst forecasts predict.

Read more »