UK share markets have been steadily sinking in recent days. So far this reflects mild bouts of selling rather than a mass exodus of investors. But it’s clear that financial market confidence is worsening.
The FTSE 100 has now lost all of the gains it enjoyed during its strong start to 2021. Hopes that a Covid-19 vaccine would be a silver bullet to the public health emergency are waning. The emergence of new coronavirus strains and problems with vaccine delivery in Europe are tempering optimism of a sharp economic recovery in 2021.
Trying to guess how UK share prices will behave in the short term is a fool’s game. But a blogpost last week from the International Monetary Fund explains why a fresh stock market crash could be around the corner.
What did the IMF say?
Flagging what it calls “the apparent disconnect between exuberant financial markets and the still-lagging economic recovery,” the IMF raised the idea of “a possible market correction should investors reassess the economic outlook or the extent and duration of policy backstop.”
The IMF says that stock investors expect governments and central banks to underpin the economic recovery by maintaining accommodative monetary policy. Policymakers have launched huge quantitative easing programmes and cut interest rates to record lows to support the global economy in the wake of Covid-19.
The IMF warns, though, that investors might be too complacent in expecting loose monetary policy to keep rolling on. It notes that while policymakers “need to keep financial conditions easy to provide a bridge to vaccines and to the economic recovery,” it added that “they also need to safeguard the financial system against unintended consequences of their policies.”
The IMF said, for example, that a steady increase in interest rates could prompt a fresh stock market crash. It notes that “expectations of very low interest rates for the foreseeable future” is one reason why analysts and investors have explained recent stock market rallies.
Getting ready to buy UK shares!
It’s clear that a fresh stock market crash could be around the corner, then. But as a long-term UK share investor it’s not something that greatly concerns me. Extreme stock market volatility is nothing new. And over the long term, stock market corrections don’t tend to stop investors from making big returns.
Studies show that long-term investors like me make an average annual return of 8% to 10%. This is because UK share prices have always rebounded strongly following crashes. Remember that the FTSE 100 doubled in value in less than a decade following the 2007-08 banking crisis.
That annual return isn’t guaranteed, of course. Nor is a doubling in value as the FTSE 100 comes back from last year’s crash. And risks remain in place, especially in the short term.
But if UK share prices do crash again, I know what I’ll be doing. Just like in 2020, I’ll be hunting for bargains to buy in my Stocks and Shares ISA. I’ll buy them in the belief that they should rise in value during the eventual economic recovery.