Could we witness a deeper stock market crash over the coming months? That’s the big question that I’m asking myself. It’s been a torrid start to the year for many global stock markets. Just looking at the FTSE 100 index, it may not feel too bad. After an 18% gain in 2021, the UK’s largest 100 shares have barely fallen by 1% so far this year. This is in contrast to the much steeper declines seen in the major US stock markets. For instance, the tech-heavy Nasdaq index is currently down by 15% year-to-date, wiping out much of the 21% gain last year.
Stock market crash: potential causes
To try to predict if the stock market pullback could get worse, I’d analyse what is currently causing the weakness. Many shares have been relatively weak ever since the US Federal Reserve indicated that it will start to raise interest rates and reduce the size of the central bank’s balance sheet. High and persistent inflation has become a problem for economic stability, and central banks will want to keep it under control. They can do this by using various tools at their disposal. However, there are consequences to these policy actions. Higher interest rates tend to reduce company valuations (and share prices), as future cash flows are discounted back to the present day at higher rates.
Don’t panic
Another less-discussed factor is psychology. Once a stock market crash starts, share prices can fall further from weak sentiment. Stock market panic can cause more panic, and the sight of losses can cause some investors to sell further. Psychology plays an important factor in the stock market.
History shows that after every stock market crash, share prices tend to recover. For instance, over the past few decades we’ve seen the dotcom bubble in 2000, the global financial crisis of 2008, the more recently the Covid crash of 2020. Bear in mind that some recoveries can take longer than others. Of course, history isn’t always a perfect guide to the future and the situation is different every time. Nonetheless, I’m creating a watchlist of quality UK shares that I’d like to buy at discount.
Top UK shares
The ‘no-brainer’ UK shares that I’ve got on my watchlist right now include property portal Rightmove, credit data leader Experian, and drinks giant Diageo.
The shares on this watchlist all have some characteristics in common. They’re excellent businesses that I believe will thrive over many years. These businesses are profitable and growing. They all have a competitive advantage that could keep them ahead of competition. Lastly, they’re also businesses that are difficult to replicate.
Even though their share prices could fall in the near term if a stock market pullback gets worse, I reckon they could recover well and thrive over the coming years.
Popular investment guru Warren Buffett once commented, “Be fearful when others are greedy, and be greedy when others are fearful”. There seems to be a lot of fear in the market right now. I reckon the second part to his advice could prove useful over the coming days, weeks, or months if the stock market crash gets much worse.