The prospect of a stock market crash may seem to have become more real over the past few days. Indeed, investors appear to be increasingly concerned about the potential for higher inflation resulting from an expansionary monetary policy.
However, the potential for a stock market crash is something that remains omnipresent. As the March 2020 bear market showed, a UK stock market decline can take place without prior warning and have a very negative impact on UK share prices over a limited timeframe.
As such, there do not necessarily need to be pre-identified risks for the UK stock market to fall heavily. This means that the threat of a market decline is always a risk on the horizon for UK investors.
The UK stock market has a long history of booms and busts. As mentioned, the most recent bear market occurred in March 2020. Prior to that, other notable periods where the UK stock market declined by more than 20% include the global financial crisis and the dot com bubble in 2008/09 and the early 2000s, respectively.
Therefore, a decline at some point in future would not be a major surprise to many investors who have been buying and selling UK shares for a number of years. There have been numerous corrections, crashes and bear markets over recent decades because of the existence of the stock market cycle. This is where periods of gains are followed by short, sharp falls in share prices. Neither period has ever lasted in perpetuity.
Clearly, some UK investors may take the view that ‘this time it is different’. They may feel that the massive support being provided by the Bank of England through quantitative easing and low interest rates, in addition to the government’s major stimulus programme, means that share prices will continue to rise. However, history suggests that gains can never continue unchecked.
Undoubtedly, guessing when the next stock market crash will occur is not an exact science. In my view, timing the stock market’s movements is impossible. There are simply too many ‘known unknowns’ and ‘unknown unknowns’ to accurately assess in order to conclude how the UK stock market will perform in future.
Judging by its past performance, the current bull market is very unlikely to last in perpetuity. However, with low interest rates making other assets relatively unattractive in my view, a strategy of buying and holding shares, while being able to take advantage of future market declines via cash resources, could be worthwhile.
It may provide an opportunity to benefit from a delay to the next stock market crash, in terms of rising stock prices in the short run, as well as offer the means to capitalise on the next stock market crash – whenever that might be.
