3 things that could trigger a new stock market crash

The UK stock market has been surprisingly resilient in the face of global economic turmoil. But could this period of optimism be coming to an end?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Hand flipping wooden cubes for change wording" Panic " to " Calm".

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

RISK WARNING: should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice. The Motley Fool believes in building wealth through long-term investing and so we do not promote or encourage high-risk activities including day trading, CFDs, spread betting, cryptocurrencies, and forex. Where we promote an affiliate partner’s brokerage products, these are focused on the trading of readily releasable securities.

I’m surprised that the Russian invasion of Ukraine did not trigger a stock market crash. There was only a brief FTSE 100 dip, which has already been reversed. And we’re still looking at a 10% rise over the past 12 months.

Saying that, the FTSE 250 has been on a slide since the start of 2022. So are smaller-cap investors leading the way down, and will London’s bigger index follow suit? Here are three things I think could send the stock market tumbling

Interest rate rises

Inflation and interest rates are both climbing. Central banks don’t want to dent any hopes of a post-pandemic economic recovery, so base rates have ticked up relatively conservatively.

But further rises should make other forms of investment look increasingly attractive, and could draw money away from the stock market. The five-year US Treasury yield, for example, is approaching 3%, which is attractive and very safe.

If inflation makes investors more nervous, we could see a move to safety in the coming months. All it might take is a shift in asset allocation by institutional investors, and we could face a bear market.

Stock market overvaluation

But FTSE 100 share prices have had a weak decade. And the lead index looks set for a 4% dividend yield this year. That means the stock market must be undervalued, surely? Well, I’ve been checking on various P/E estimates for stock market indices.

Right now, on a trailing 12-month basis, the FTSE 100 P/E stands at about 15.1. At the end of December 2019, just before the Covid-19 pandemic struck, it was around 16.3.

Is that very small fall in the value of UK stocks sufficient to cover the effects of the pandemic, the Ukraine war, and the havoc of soaring fuel prices? Maybe the stock market isn’t as cheap as it first seems.

Commodities fall

Some of today’s biggest FTSE 100 dividend yields come from miners. Rio Tinto, for example, is on a forecast yield of 10%. That is all on the back of rising commodities prices. Prices for iron ore and copper, for example, have almost doubled over the past five years. But have we reached the peak of the current cycle?

If demand should start to fall, mining dividends and share prices could drop. And that could add another knock-on effect to the stock market overall. Is it likely to happen? Soaring inflation and geopolitical upheaval are things that do tend to hit demand.

What should I do?

I know what I’m not going to do — I’m not going to panic and sell any shares. I’ve heard suggestions that analysts have predicted at least 10 of the last five stock market crashes. And even the ones they got right haven’t lasted for long.

I’ll keep on looking for shares in great companies at what I consider fair prices. And every time I have enough spare cash, I’ll buy. And if we get a crash, I’ll buy at even cheaper prices.

RISK WARNING: should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice. The Motley Fool believes in building wealth through long-term investing and so we do not promote or encourage high-risk activities including day trading, CFDs, spread betting, cryptocurrencies, and forex. Where we promote an affiliate partner’s brokerage products, these are focused on the trading of readily releasable securities.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Publish Test

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut…

Read more »

Investing Articles

JP P-Press Update Test

Read more »

Investing Articles

JP Test as Author

Test content.

Read more »

Investing Articles

KM Test Post 2

Read more »

Investing Articles

JP Test PP Status

Test content. Test headline

Read more »

Investing Articles

KM Test Post

This is my content.

Read more »

Investing Articles

JP Tag Test

Read more »

Investing Articles

Testing testing one two three

Sample paragraph here, testing, test duplicate

Read more »