4 reasons why I think the probability of another stock market crash is falling

When looking at the fiscal and monetary support, along with vaccine progress, Jonathan Smith doesn’t see another stock market crash on the horizon.

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.

If I rewind a year, at this point in 2020, the FTSE 100 was just starting to recover from the stock market crash seen in March. In fact, it wasn’t just the FTSE 100, but other stock markets around the world. Back then, the mounting concern around Covid-19 had seen investors collectively sell out of stocks.

The catalysts for a stock market crash vary each time one happens, with some being more predictable than others. However, despite ongoing fears of another, I think the odds of an imminent crash are falling.

The stock market is in a different place to last year

I don’t think that we’ll see another stock market crash related to Covid-19 this year. I know this is a bold statement. But consider the difference between the crash last year versus now. Last year, there had been no adjustment in expectations for companies in the travel and tourism sectors.

As we stand today, this point has been addressed. The share prices of some airline operators and travel companies are lower, factoring in the negative impact on revenues due to the virus. Others sectors that rely on physical footfall, or simply companies that haven’t adapted, have seen a share price tumble. This natural adjustment means companies are more fairly priced now given what has happened, so shouldn’t need a further crash to adjust further.

Another reason why I think the chances of a stock market crash are receding is due to the accommodative stance taken by governments and central banks. For example, in the UK we’ve seen the furlough scheme, Covid loans and other measures to help businesses. The Bank of England has cut the interest rate down to just 0.1%. 

All of this could allow public listed companies to steady the ship and be ready to bounce back in 2021. Obviously, all of the public sector spending comes at a cost. But I don’t see a stock market crash this year due to a lack of help from the government.

A brighter outlook could see a rally 

The most compelling reason I don’t see a stock market crash this year is due to the vaccine progress. Not only do we now have a vaccine, it’s been taken by more than 30m people in the UK. So the outlook for companies within the FTSE 100 index and others is positive, not negative. 

If anything, I think we will see stocks (and the overall index) rally in 2021 as optimism spreads regarding the UK economy. Easing lockdown restrictions should provide a much needed boost to companies in the sectors that were hardest hit from the stock market crash last year.

Given my above reasons, I’m actually looking to buy some stocks that could capitalise on the optimism for this year. One example is Auto Trader Group, which provides a marketplace for trading cars. The reopening of the economy should see pent-up demand for vehicles released, especially as physical viewings can be arranged.

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.

jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK has recommended Auto Trader. 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

Young Caucasian man making doubtful face at camera
Investing Articles

Surprise! This monopoly stock has taken over my Stocks and Shares ISA (again)

Our writer has a (nice) dilemma in his Stocks and Shares ISA portfolio after one incredible growth stock rocketed higher…

Read more »

Investing Articles

10.5% yield – but could the abrdn share price get even cheaper?

Christopher Ruane sees some things to like about the current abrdn share price. But will that be enough to overcome…

Read more »

Investing Articles

£9,000 to invest? These 3 high-yield shares could deliver a £657 annual passive income

The high yields on these dividend shares sail sit well above the FTSE 100 average of 3.6%. Here's why I…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

I’ve got £2k and I’m on the hunt for cheap shares to buy in December

Harvey Jones finally has some cash in his trading account and is hunting for cheap shares to buy next month.…

Read more »

Investing Articles

Down 25% with a 4.32% yield and P/E of 8.6! Is this my best second income stock or worst?

Harvey Jones bought GSK shares hoping to bag a solid second income stream while nailing down steady share price growth…

Read more »

Investing Articles

Here’s how the Legal & General dividend yield could ultimately hit 15%!

The Legal & General dividend yield is already among the best of any FTSE 100 share. Christopher Ruane explores some…

Read more »

Investing Articles

Is December a good time for me to buy UK shares?

This writer is weighing up which shares to buy for his portfolio next month, and one household name from the…

Read more »

Investing Articles

Is it time to dump my Lloyds shares and never look back?

Harvey Jones was chuffed with his Lloyds shares but recent events have made him rethink his entire decision to go…

Read more »