January was a highly volatile month for the stock market. While the UK’s FTSE 100 index held up relatively well, due its exposure to the energy sector, some areas of the market were hit hard. Hyper-growth stocks, for example, were decimated.
While the market had a bit of a rebound towards the end of the month, I’m not convinced we’ve seen the end of the volatility. Here, I’ll explain why. I’ll also explain what I’m doing in preparation for another stock market crash.
Why we could see another stock market crash
The main driver of the volatility in January was interest rate uncertainty. Right now, there’s a lot of uncertainty over how many interest rate hikes we’re going to see from the US Federal Reserve this year, and this is unsettling investors. This is largely because higher rates lower the appeal of owning stocks.
While the stock market has largely regained its composure more recently, the issue with the Fed and its interest rate hikes is far from resolved. For example, while most economists expect at least four US interest rate increases this year, some think we could see up to seven.
Given the lack of clarity, I think there’s a good chance we’ll see more market volatility in the near term on the back of uncertainty over the Fed’s interest rate moves. We could even be seeing the beginning of it already. Yesterday, a lot of high-growth stocks experienced sharp declines.
More volatility to come?
It’s worth noting that it’s not unusual to see multiple bouts of volatility within the space of a few months. For example, in September 2020, the S&P 500 index fell by around 10%, recovered most of its losses quite quickly, and then fell by nearly 10% again in October.
We saw a similar kind of ‘W’ pattern with the S&P 500 in early 2016. That’s why I wouldn’t be surprised to see more near-term volatility as the market struggles with interest rate uncertainty.
Of course, stock market volatility is not something to be afraid of. It’s a very normal part of investing. The key to handling it is to be prepared. If we are prepared, we can take advantage of the lower share prices on offer. And that means potentially boosting investment returns in the long run.
How I’m preparing for another crash
In terms of what I’m doing to prepare for another stock market crash, there are two main moves I’m making right now. Firstly, I’m stockpiling cash in my ISA and Self-Invested Personal Pension (SIPP).
My cash levels are a bit low at the moment because I did a fair amount of buying in January during the volatility. I want to have a ‘war chest’ ready in case we see more days like last Monday, when fear levels were high and nearly every stock was down significantly.
Secondly, I’m working on my shopping list. I’m putting together a list of the stocks I want to buy and the prices I’d like to pay. This way, I’ll be ready to strike if shares prices fall. Some examples of stocks on my shopping list include Apple, Microsoft, Visa, Nvidia, and Diageo.