I’m increasingly worried about the risks of a full-blown stock market crash. Actually, I’ve been increasingly fretting about this outcome since late 2021, but it has yet to happen. However, the Russian invasion of Ukraine has triggered a meltdown in certain markets. As I write, the US S&P 500 index lies 13.4% below its all-time high, reached on 3 January.
Furthermore, the tech-heavy Nasdaq Composite index has crashed by 21.1% since it peaked on 22 November 2021. Thus, it has passed the 20% decline that signals a full-on bear market/stock market crash. That’s bad news for investors who had piled into high-priced US tech stocks last year. Meanwhile, here are four important points I’ve noted as the world watches war in horror.
1. Commodity prices are soaring
To watch huge volatility and price spikes, I’ve been monitoring commodity prices closely over the past fortnight. Last week, I saw one of the biggest weekly jumps in commodity prices since the oil shock of 1979. Across the board, commodity prices jumped for energy, metals, and foodstuffs. As a result, the Bloomberg Commodity Index (BCOM) has soared by 34.6% in 2022 and has gained 51.7% over one year. The bad news is that soaring materials prices will feed into inflation, lifting consumer prices. This could trigger a global slowdown — or even a recession leading to a stock market crash. Yikes.
2. Stock market crash: when investors panic, they sell what they can
As markets dived on Friday and Monday, I saw clear signs of investor panic. When fear overcomes hope, investors rush to sell what they can — typically, blue-chip shares. In this scenario, the baby often gets thrown out with the bathwater, as investors dump quality stocks to improve their liquidity. Hence, I saw many high-quality FTSE 100 shares take a beating over these 48 hours. In under two days, the Footsie lost 8.2% of its value, before rebounding on Monday afternoon. It’s now down just 4.7% over the past five days. As a naturally sluggish investor, I’m glad I sat tight during this mini-stock market crash, rather than rushing to sell.
3. Low growth and high inflation equals stagflation
As a young lad in the 1970s, I remember how tough that era was for low-income families, including mine. As oil prices skyrocketed and consumer prices soared, inflation went through the roof. This caused economic growth to collapse, while a wage-price spiral kept pushing inflation ever higher. As a result, the 1970s are remembered as the age of stagflation, combining slow economic growth and high unemployment with rising prices. Now fears are rising that we might endure similar economic conditions due to Russia’s invasion of Ukraine. I sincerely hope not, because the 1970s stock market crashes were really fierce.
4. Stock market crash: could Chinese assets be next?
With Russia being almost completely unplugged from the global financial system, Russian stocks and bonds have plummeted in value. As I wrote on Monday, Russian assets are all but worthless today. What if investors decide that investing in, say, Chinese assets is too risky in this unstable geopolitical climate? The Chinese SSE Composite Index has already fallen 11.5% since 13 December. I suspect it has further to go.
Meanwhile, I’m building a cash pile to invest in cheap UK shares paying high dividends. Right now, my mantra for investing is boring, but safe. It helps me to sleep easier at nights!
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