To answer the question asked in the title right off the bat, the answer is yes. We saw a mini-meltdown just on Thursday, when the stock markets reacted badly to the Russian invasion of Ukraine. The FTSE 100 index closed more than 3% down at sub-7,300 levels. The good news is that as on Friday, much of the losses have already been recovered. As I write, the index is trading closer to 7,500 levels. Heartening as it is, it does not rule out a potential stock market crash.
Energy prices could go through the roof
And that is because prices could rise significantly. We have already seen an increase in crude oil prices to over $100 a barrel as the news of the war broke. Russia is also the biggest supplier of natural gas to Europe, prices of which could rise as well. Increased fuel costs are bad news at a time when inflation is already high, which has already been seen to create stock market uncertainty in the recent past.
In the UK, the latest inflation figure is at an elevated 5.5%, which is a 30-year high. The fact that is 3.5 percentage points higher than the Bank of England’s target rate of 2% puts the heating up of prices into perspective. If we pencil in even higher fuel prices, we are also looking at its second-round effects on inflation. This is because fuel is a cost that is factored into all goods and services’ prices, either as heating costs for offices, the costs of transportation, or for that of travel, as examples. This would show up in FTSE 100 companies’ costs and potentially squeeze their margins as well.
Russian miners could drag the FTSE 100 down
FTSE 100 companies based in Russia could be impacted too. Consider miners like Evraz and Polymetal international, which were the biggest losers in Thursday’s trading. This is bad news for the stock markets in general but particularly bad news for dividend investors. Evraz is a generous dividend payer, accounting for around 15% yields before its share prices plummeted recently. Polymetal International too had a pretty decent dividend profile till recently. Ironically, I had bought the precious metals miner as a hedge against total disaster. But to put it in the words of British pop singer Robbie Williams “I sit and talk to god and he just laughs at my plans”!
So what happens if there’s a stock market crash?
And these are just two reasons that could drag the stock markets down. There are more that I will not get into here. Because I now want to focus on what could go right. There are already signs that the stock market rout has been contained for now. This is not the first time that we have been through a market shock. Remember March 23, 2020, when the FTSE 100 index fell to 4,993? What a long way we have come since. And I do not think that the situation is so bad (at least not yet) to engulf the world and for me to make a run for a nuclear bunker. On the contrary, many of my investments are showing gains today. So instead of focusing on a stock market crash, I will keep calm and carry on investing!