Since late 2021, I’ve been worried about the next stock market crash. After all, returns from stocks from 2019 to 2021 were outstanding. Indeed, the American S&P 500 index rose by 28.9% in 2019, 16.3% in 2020 and 26.9% in 2021. These figures exclude dividends, which boost total returns even higher.
I was unconvinced that such outstanding returns would persist beyond 2021. Last year, I repeatedly warned that I expected stock markets to be loss-making, more volatile, and less liquid in 2022-23. My opinion has yet to change, because I fret about these four things (using the acronym PRIC). However, as a value investor, I see steep price falls as huge opportunities to buy discounted shares in quality businesses.
These four things make me anxious about a possible stock market crash:
Pandemic
The Covid-19 pandemic appears largely under control in Western Europe, the US and other highly vaccinated areas. Alas, in poorer nations, the virus is still causing problems. For instance, 26 million people living in Shanghai, China have been locked down for weeks. As more cities face restrictions under China’s zero-Covid policy, this is having an effect on China’s growth, which is bad for the global economy.
Russia
It has been 56 days since Russia invaded Ukraine on 24 February. This plunged two nations with a combined population of 190m people into Europe’s largest conflict since 1945. Initially, this invasion sent share prices plunging, but we avoided a stock market crash. Indeed, the UK’s FTSE 100 index is actually up 2.5% since 31 December 2021. This astonishes me, given the long-term repercussions of this event — which other investors seem to be ignoring.
Inflation and interest rates
Right now, inflation is red-hot on both sides of the Atlantic. In the UK, it hit 7% a year in March, the highest level since March 1992. In the euro area, yearly inflation leapt to a record high of 7.5% in March. And in the US in March, inflation hit 8.5% a year, its highest level since December 1981. In order to reduce inflation, the Bank of England and US Federal Reserve will repeatedly raise interest rates in 2022-23. And while rising interest rates don’t directly appear to trigger stock market crashes, they have played some part in previous downturns.
China
I mentioned the C of PRIC earlier: China. At around $18.5trn this year, the Chinese economy is second in size only to the USA’s. China’s gross domestic product is forecast to grow by 5.1% this year. But that’s well below last year’s growth rate of 8.1% and the 6% growth of pre-pandemic 2019. And as the world’s workshop, if China’s economy sneezes, the rest of the world might catch cold.
I buy during stock market crashes
Finally, I must admit that I’m not as afraid of stock market crashes as I once was. That’s because I made some of my best long-term gains by buying cheap shares during the 2000-03 and 2007-09 market meltdowns (and in spring 2020). That’s why I’m building up as much cash as I can to invest in cheap, dividend-paying shares when Mr Market eventually has his next tantrum. Through buying cheap shares during market downturns, I expect to boost my future returns considerably. And that will hasten my comfortable retirement!