Stock markets could crash. What should I do?

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No one can say for sure when a stock market crash will occur.

Many different economic levers compete to pull financial markets in certain directions. Any of them can have a significant influence on how investors and traders behave.

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Investor sentiment can also be volatile and subject to large and unpredictable movements. Unexpected events can also occur out of the blue and cause stock prices to fall.

3 Reasons Markets Might Still Crash

That said, a steady stream of worrying economic data today means another stock market crash cannot be ruled out soon. The FTSE100 fell again on Thursday (currently down 2.1%) following poor earnings releases that heightened fears over economic conditions.

There are several good reasons why another correction could be imminent. These include:

1) More shocking inflation data

Despite rampant rate hikes by central banks, prices continue to rise at their fastest pace in decades across major regions. Many think the problem will get worse before it gets better.

Today, grocery researcher IGD predicted that food inflation in the UK could reach a shocking 15% over the summer. Inflationary pressures could remain heightened as long as the war in Ukraine continues.

2) Excessive central bank tightening

Too severe monetary tightening by central banks threatens to stifle the economic recovery. For this reason, an unexpected action by policymakers can also aggravate market volatility. Yesterday the Federal Reserve announced the biggest rate hike since 1994. In a shock move this morning, the Swiss National Bank raised rates for the first time in 15 years.

Chief investment strategist at Edison Alastair George warned that “the risk of a warmongering policy error is increasing in our view.“He notes that”the call to stand firm and not tighten policy too much… will be brave and difficult to make.”

3) A continuous increase in Covid-19 cases

The spread of new variants of Covid-19 has led to a further increase in the number of cases in key regions such as China and the United States.

The problem has further fanned the inflationary fire as supply chains have been disrupted. The challenge for the global economy could also become much more difficult if lockdowns return outside of China, as we saw in 2020.

Here’s what I do now

As I said, predicting the timing of a stock market crash is a difficult task. But I believe I should always be ready for a correction.

I’m preparing for a crash in the not too distant future. I am not preparing to sell or reduce my stock holdings and take shelter. Instead, I build a list of the best stocks that I will look to buy if their value drops.

Indeed, in the long run, investing in stocks is a proven way to build tremendous wealth. Even allowing for periods of market volatility, investors tend to realize an average annual return of around 8%.

Nothing is guaranteed in life and no one can promise that stock markets will recover from another crash. However, history shows us that stock prices have always recovered strongly after periods of extreme weakness.

And by buying when stock prices are falling, I could potentially boost my returns by taking advantage of the rebound, should it occur.

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