No-one can say with any certainty when a stock market crash will happen.
There are many different economic levers competing to pull financial markets in certain directions. Any one of these can have a significant influence on the way investors and traders behave.
Investor sentiment can also be fickle and subject to severe and unpredictable movements. Unexpected events can come out of the blue too that send share prices plummeting.
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!
3 reasons why markets could crash again
That said, a steady stream of worrying economic data today means that a fresh stock market crash soon can’t be ruled out. The FTSE 100 has slumped again on Thursday (currently down 2.1%) following some poor earnings releases that have worsened fears over economic conditions.
There are several good reasons why another correction could be just around the corner. These include:
1) More shocking inflation data
Despite frantic rate hikes by central banks, prices continue to rise at their fastest for decades in major regions. Many think the problem will get worse before it gets better too.
Today, grocery researcher IGD predicted food inflation in the UK could reach a shocking 15% over the summer. Inflationary pressures could remain heightened as long as the war in Ukraine continues.
2) Over-tightening by central banks
Overly-severe monetary tightening by central banks threatens to choke off the economic recovery. Because of this, unexpected action by policymakers may worsen market volatility too. Yesterday, the Federal Reserve announced the largest rate increase since 1994. In a shock move this morning, the Swiss National Bank raised rates for the first time in 15 years.
Chief investment strategist at Edison Alastair George has warned that “the risk of a hawkish policy error is in our view increasing.” He notes that “the call to stand firm and not overtighten policy… will be a brave and tough one to make.”
3) A continued rise in Covid-19 cases
The spread of new Covid-19 variants has meant the number of cases in key regions like China and the US are rising again.
The problem has fanned the inflationary fire further as supply chains have been disrupted. The challenge for the global economy could get much steeper as well if lockdowns return outside of China as we saw in 2020.
Here’s what I’m doing now
As I say, predicting the timing of a stock market crash is a challenging task. But I believe I should always be prepared for a correction.
I’m getting ready for a crash in the not-too-distant future. I’m not preparing to sell or reduce my share holdings and run for cover though. Instead, I’m building a list of top stocks I’ll be looking to buy if they plummet in value.
This is because, over the long term, stock investing is a proven way to build terrific wealth. Even accounting for periods of market volatility, investors tend to make an average yearly return of around 8%.
Nothing is guaranteed in life and no-one can promise that stock markets would recover from a fresh crash. However, history shows us that share prices have always recovered strongly from periods of extreme weakness.
And by buying when share prices are down I could potentially turbocharge my returns by riding the rebound, should it come.
