blue and yellow graph on stock market monitor

Late last week, the FTSE 100 dropped below 7,000 points. Since breaking above this level back in the spring, it has only meaningfully broken this level twice. Once back in July, when the dip was bought around 6,800, and again last week. With the market opening lower again today, is this another dip to buy, or could this be the start of another stock market crash?

Covid-19 variants

Clearly, it’s unlikely that Covid-19 in itself could be a catalyst to cause another stock market crash, as the surprise element has been taken away. However, the impact of Covid-19 variants could see the market grind lower. 

For example, some countries are committed to putting extreme lockdowns back in place even with just a few confirmed case numbers. New Zealand highlighted this last month. Even countries that have tried to lift restrictions as much as possible (e.g the UK), are considering a circuit breaker lockdown this winter.

The economic implications of lockdowns has been proven to be a negative. So if we head towards the winter with a lot of pessimism in the air, then a leading indicator like the stock market could easily take a tumble and crash.

Rising inflation fears

Another reason for a potential stock market crash is inflation. As we covered in our FX Review, UK inflation came out last week at a whopping 3.2% year-on-year print. The previous print was 2% for comparison. Although some of this jump can be put down to the summer Eat Out bump, it’s a figure that will cause the Bank of England to raise their eyebrows.

The implications for the stock market are as follows. Higher inflation could lead to higher interest rates in order to stem demand. Higher rates will mean higher refinancing rates for debt issues or rolled over by FTSE 100 listed stocks. These higher costs will go onto the balance sheet, ultimately negatively impacting the bottom line of profit.

So if we do see inflation continue to move higher in the UK, the stock market could crash as investors catch up to the knock-on impact.

Fear of the unknown

The final reason for a potential market crash is global instability. Recently we saw the ill-managed withdrawal of troops from Afghanistan. Data out in recent weeks indicates a potential slowdown in Chinese economic performance. These are just two examples that spring to mind that highlight the sensitivity of current affairs. 

If we see something crop up that the market hasn’t been expecting, or that it has mis-priced the risk of, then this could be a catalyst for another crash. In short – the fear of the unknown.

On balance, a stock market crash isn’t something we are overly concerned about. Protection can be obtained for downside risk by shorting the market, buying Put options, buying defensive stocks or buying negatively correlated assets such as gold.

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