In my opinion, the next month is going to be crucial in setting the tone for the market in 2024. There are two linked events that will provide the moment of truth for all those that are claiming a stock market crash is imminent. Here’s what they are and what I’m doing about them.
Key events to note
The first event is the release of December UK inflation data on 17 January. The second is the Bank of England meeting, which is three weeks today (1 February). These two events are linked and are key for the stock market.
UK inflation has been falling, hitting 3.9% last month. The lower readings have been one reason why the stock market has been doing well over the past couple of months. The expectation is that, due to falling inflation, the Bank of England will start to cut interest rates. This should act to further push up stocks, with firms enjoying lower borrowing costs and generally more optimisitic sentiment.
However, the December US inflation data just out showed that an increase from last month. There’s some concern that the UK also might experience a pop higher in inflation data. If this does happen later in the month, it could prompt the Bank of England to not signal rate cuts. In fact, the committee might offer comments that they want to keep rates higher for longer.
It’s this scenario that could be a catalyst to spook investors and spark a short-term crash.
Remaining nimble
No one can predict the future. We’ll have to wait and see if the next few weeks prove to be the beginning of a market crash. Yet even though I don’t know what’s going to happen, I can still prepare myself for any outcome.
One way is by keeping some cash spare. This gives me some dry powder to go and buy some of my favourite stocks if we do see the share prices fall sharply. History tells me that steep falls in the market often don’t hang around for too long before moving back higher. So I want to make sure I don’t miss the oppourtunity.
As for my existing stocks, there’s a chance that my portfolio value will fall if we get a crash. But I can look to buy some more of my current holdings at a lower price. This is known as pound-cost averaging. For example, if I hold a stock I’d bought at 100p and it falls to 80p, I can buy more at the lower price. This would give me an average price of 90p.
Sifting through the noise
Over the coming weeks, I expect a lot of chatter to happen regarding the inflation outlook and central bank decisions. The market will likely get volatile around these periods, so it’s key for me to filter out the noise and just focus on what the data means for the long term. Then I can make sound, objective investment choices.
