It seems renewed fears of a stock market crash are on the rise again. A strategist from FS Investments Group has called for a 25% drop in stock prices in the US by the end of 2023. And if that’s true, the UK will likely follow.
The cause is, unsurprisingly, interest rates. Despite inflation steadily dropping, the labour markets remain strong. This suggests there are far more rate hikes on the horizon both here in the UK and across the pond. But if central banks become too aggressive, a recession may be inevitable, spooking investors while causing chaos for businesses.
So should investors be worried? In my opinion, no.
The long-awaited crash
Obviously, FS Investment’s prediction is concerning. And yet, I remain unphased.
There have been calls for a recession and subsequent crashes like this for years now. And, so far, these bearish investors have been proven wrong. In the meantime, the FTSE 250 is up roughly 10% in the last nine months, with the S&P 500 in a new technical bull market.
It’s still too early to tell, but current trends suggest the stock market recovery from last year’s correction is already under way. There’s no guarantee, of course. But if the bears are once again wrong, then selling shares today, or waiting for another stock market crash, could leave an enormous amount of money on the table.
Does this mean investors should go Rambo and start buying all the cheap UK shares they can find? That’s certainly one way to achieve superior long-term gains. But it assumes the recovery will continue, which, as I said, isn’t guaranteed. If FS Investment Group proves to be right, such an investment strategy will likely destroy wealth rather than create it.
That’s why, personally, I’ve been drip-feeding capital into the markets over the past year. By deploying pound-cost-averaging, my investments have been steadily getting topped up. When prices were still falling, this dragged my average cost per share down, resulting in far better returns that now stand in double-digit territory since 2023 began.
This way, if the stock market continues to recover, I still benefit from higher returns. But if things take a turn for the worse, I still have money on hand to take advantage of even cheaper UK shares.
Finding bargains in 2023
Finding cheap stocks during periods of heightened volatility is certainly easier than under normal market conditions. After all, emotional investors make mistakes that create opportunities. But it’s not a matter of just buying any beaten-down stock.
The changing economic landscape is having a tangible impact on businesses and consumers. And this cannot be ignored. Looking through the FTSE 250, plenty of shares trading firmly below pre-correction levels may struggle to recover even if a stock market crash doesn’t materialise.
Investors must thoroughly investigate each company, paying particular attention to debt exposure. A firm with tight profit margins and a large pile of outstanding float rate debt will likely struggle to keep up against more nimble competitors. This risk is only amplified if there are no discernible competitive advantages to fight off rivals attempting to steal market share.
