October can be a nervous month in the stock market. The legendary 1929 Wall Street crash was in October. So too was the 1987 one.
Could we see another October crash?
The follies of market prediction
The short answer is yes. The stock market is cyclical. Sooner or later we will see another crash.
That could conceivably come this month. A pending US election, uncertain economic outlook and high geopolitical tensions are making investors nervous not only in the City, but also on Wall Street.
However, there is no specific indication that a crash will come this October, this year, or even this decade. The FTSE 100 hit an all-time high this year. So too did the Dow Jones Industrial Average. So too did the S&P 500.
One might point to those records as signs of a frothy market waiting to burst. Alternatively, maybe they indicate that a lot of capital is available to investors who remain confident in current valuations.
In other words, we simply do now know when the stock market will next crash.
Acting ‘as if’ can be right for the smart investor
Still, ruminating on a potential market crash has more than theoretical value for the savvy investor, in my view.
One practical application is taking a few moments to consider my own asset allocation. For example, what is the balance between shares, cash and other assets? Would I be in a situation where, if a stock market crash were to come tomorrow, I would regret the allocation I had going into it? If so, now could be a good time for me to amend that allocation!
Another practical implication is thinking about what shares I might want to buy if a stock market crash brings their price into line with what I see as good value.
Building a shopping list at the right price
As an example, consider Bunzl (LSE: BNZL). Selling mops and takeaway food containers might not sound like the most exciting of businesses to be in. But as the old saying goes, “where there’s muck there’s brass”. Janitorial supplies specialist Bunzl has helped its investors as well as its customers clean up over the years.
The past five years alone have seen a 72% increase in the Bunzl share price. If I had invested in 2009, when the last financial crisis pushed the shares down, I would now be sitting on a return of over 580%. That is excluding the dividend, which has grown annually for over three decades.
Whether Bunzl can continue doing as well remains to be seen. Many of its markets are commodity markets and in a weak economy, it could be undercut by cheaper rivals.
But what puts me off buying Bunzl shares now is not that risk, it is the valuation. The company trades on a price-to-earnings ratio of 24. If a stock market crash makes the valuation more attractive, I want to be ready to buy.
So I am spending time now keeping an updated list of shares I would like to buy if they become available – even only briefly – at what I think is an attractive price.
