The past two weeks have seen increased volatility in UK shares and US stocks. Since 15 February, the FTSE 100 has dropped by more than 4%, before bouncing back to 6,660 points today. Meanwhile, fears of a US tech bubble have knocked 200 points off the S&P 500 since its record high on 16 February. What’s going on? And should I pay attention to fears of a coming stock market crash?
Stock market crash: I watch these five warning lights
1. UK and US bond yields
Since early 2021, UK and US government bond prices have been sliding, driving up bond yields. Since higher bond yields point to higher inflation and increased borrowing costs, this has unnerved equity investors. Today, the benchmark 10-year Treasury yield peaked at 1.624%, its highest level in a year. Likewise, the 10-year UK Gilt yield is 0.783%, the highest since March 2020’s market meltdown. Thus, UK investors worried about a stock market crash should keep a close eye on bond yields. Any further weakness in bond prices could spell bad news for share prices.
2. UK and US inflation
Bond prices are falling and yields rising because investors worry about inflation. If rising consumer prices lift inflation too much, then the US Federal Reserve and the UK Bank of England may need to raise interest rates. However, if any inflation surge above the 2% target proves temporary, then interest rates should stay at rock bottom. Again, investors worried about the risks of a stock market crash should watch inflation levels like a hawk.
3. The oil price
As the global economy undergoes a post-Covid-19 bounce, demand for oil should also rebound. Yesterday, the OPEC cartel and its allies voted to freeze oil output at current levels. An unchanged oil supply pushed up the price of Brent crude by 3% to $68.74 a barrel today. Furthermore, the Brent crude price is up more than a third (37%) in 12 months. Obviously, higher oil prices feed directly into inflation, so I routinely monitor the price of ‘black gold’. Meanwhile, investors looking to profit from higher oil prices could check out the very generous cash dividends on offer at British supermajors Royal Dutch Shell and BP.
4. GDP growth
Economists are universally optimistic that economic growth will surge worldwide as the Covid-19 threat recedes. For example, Beijing expects China’s economy to grow by more than 6% in 2021. With another round of US stimulus spending on the horizon, the American economy could also come roaring back. But accelerated economic growth can trigger higher pay rises, feeding into consumer prices and lifting inflation. Thus, while I worry about a stock market crash, I’ll keep my eye on GDP (gross domestic product) growth in the US, UK, and other large economies.
5. Warren Buffett is worried about bonds
Warren Buffett, the billionaire Oracle of Omaha, appears more worried about a bond bubble than a stock market crash. Buffett recently warned, “Bonds are not the place to be these days”. But higher interest rates reduce the present value of future corporate cash flows. In this scenario, worst hit might be highly valued US tech stocks. Of course, I agree with ‘Uncle Warren’, which is why I favour cheap UK shares paying huge cash dividends! Indeed, I see the UK’s FTSE 100 as offering some of the best deals in years for value investors like me. That’s why I’ll keep buying UK shares for now!