Are we on the cusp of another stock market crash? UK share prices have tumbled in recent sessions as market-makers become more pessimistic about the economic recovery. In fact a fresh Bank of America survey shows how investor confidence has gone through the floor. Just 13% of the fund managers Bank of America quizzed now predict the global economy to strengthen in the months ahead.
This is the lowest percentage since the Covid-19 outbreak decimated market sentiment in spring 2020. This is also down from the peak of 91% recorded six months ago.
Most worrying are signs that positioning in asset markets remains profoundly bullish. Net allocation to equities remains at 50% overweight, it said, well above the historical average of around 29%. This has fuelled speculation that a stock market crash could be around the corner.
Preparing for a stock market crash
It’s no surprise to me that Covid-related concerns are dominating investor thinking. Worldwide infection rates continue to climb at an alarming rate, illustrating the danger that variants like the Delta one pose to the economic climate. Deteriorating economic data from China and the US in recent weeks shows that this is already starting to choke off the recovery.
Concerns over runaway inflation — and the possibility of severe tightening in central bank policy in response – could also prompt a fresh stock market crash. Markets breathed a sigh of relief yesterday when the latest CPI gauge came in lower than expected. This showed annual US inflation growth of 5.3% in August, better than the 5.4% predicted.
Still, these CPI readings continue to show staggering year-on-year growth. And Tuesday’s release followed a report last week showing producer prices jump at their fastest pace on record. I think worries over heightened inflation will persist for some time.
Thinking like Warren Buffett
The spectre of another stock market correction looms large, then. But I’m not worrying. As someone who buys UK shares with a long-term view I’m comforted by the strong response that equity markets have shown each time they’ve been challenged.
Just don’t take my word for it, though. As Warren Buffett famously said: “In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”
UK share markets have similarly risen strongly in the years following a stock market crash. Let’s not forget that the FTSE 100, which sank in the aftermath of the 2007/08 banking crisis, more than doubled in value from 2009’s depths to the all-time highs recorded in mid-2018.
So if stock markets crash again I’ll be following Warren Buffett’s advice to “be fearful when others are greedy and greedy when others are fearful”. I’ll be searching UK share markets for great stocks to pick up at rock-bottom prices. This sort of strategy has the potential to give my eventual returns a significant boost.
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Royston Wild 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.
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