It sounds strange right now, I know. I mean, the FTSE 100 The index hit its highest level in two months on Thursday. As I write this Friday afternoon, it is maintaining those levels.
So why am I talking about a stock market crash?
UK economy shows weak recovery, FTSE 250 stalls
I am basing myself on the growing risks to the global recovery, which could weigh on the performance of companies and the stock markets.
The latest UK growth figures, weak for August, have been a wake-up call to me. The economy grew only 0.4% month-on-month in August, even after the easing of containment measures. In relation, the FTSE 250 The index, which is roughly representative of the performance of UK-based companies, stagnated last month. This could indicate that the stocks that make it up are not rising fast enough to push the index up.
Lower numbers expected across the pond
And it’s not just the UK where growth is disappointing. investment bank Goldman Sachs has just revised downwards its growth forecasts in the United States. He now expects growth in 2022 to slow from 4.4% to 4%. Economic growth is a reflection of how individual businesses are doing at a collective level. So, the expected weakness of the economy means that we can also expect weaker corporate results.
The United States is the world’s largest economy. So everything that happens in the United States affects the rest of the world as well. Now, the latest forecast cut is hardly scary. But slower growth can be unsustainable for some companies. This can trigger contagion. We have seen this recently in the Chinese context. The near collapse of real estate developer Evergrande caused stock market jolts around the world.
Withdrawal of support
I would not rule out such events any further, especially since the support policies are withdrawn. In the UK, the holiday scheme has been abolished, which could lead to higher unemployment. And the cancellation of the stamp duty holiday could be bad news for the real estate market. This is mainly because the recovery is too weak to sustain it. A handful of real estate developer stocks in the FTSE 100 have supported it well over the past year, as their stock prices have rebounded from soaring house prices. They may not be able to do it now.
Central bank quantitative easing in the form of bond purchases could also be reduced. The US Federal Reserve mentioned this in the context of rising inflation. This could derail any recovery seen so far. And inflation as such is also a big imminent risk.
What i would do now
What I mean is keeping in mind that the stock markets were very nervous until recently, I think any news could trigger them into a crash. This does not mean a catastrophe, it would probably only be a short-term market downturn. Also, I can’t ignore the fact that the FTSE 100 is currently hitting two month highs so the crash might not happen at all. But I would still be prepared for a stock market crash and keep my investment wishlist ready to add stocks to my investment portfolio if their prices drop.
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