Ok so first lets talk about the reasons people are worried about a stock market crash right now. Not many people remember what happened in 2000 when the Nasdaq tech index soared above 5,000 points. Then the crash happened... the market dropped by almost 80% down to only 1100 points during the Autumn of 2002. How long did it take to recover? Just shy of 15 years to get back above 5000 points!
Many analysts view today’s Nasdaq as a giant tech bubble waiting to pop, also fearing that it will trigger a global stock market crash. The index has rocketed since 2016, rising 28% in 2017, 35% in 2019, and 43% in 2020. Its only losing year was 2018, declining 4%. On 16th February, the Nasdaq peaked at 14,175 points. Yesterday, it closed at 13,120 points, down over 7.5% in little over a week. Maybe this bubble has let out a little air, as US tech stocks still remain overpriced. If it declines further, it could be bad news for markets on the whole.
What About Rising US Bonds?
There is a train of thought that there won’t be a stock market crash, because dividend yields look more attractive than bond yields. The problem with arguing that stocks are attractively priced compared to bonds is that the bond market has enjoyed a strong bull market for 40 plus years. With the top bonds offering zero or negative yields, perhaps the bond market is also a waiting to crash? Just like US tech stocks, a little air just escaped from the bond bubble. Since 10th Feb, the 10 year US Treasury yield has gown from 1.13% to 1.61%, its highest level in 12 months. Note that the UK 10 year Gilt yield today hit its highest level since the summer of 2019. If borrowing rates keep rising, this might trigger a stock market crash, as has happened in the past.
But What About Inflation
It’s clear that Bond yields are creeping up because investors worry about higher inflation. If inflation stays low, as it has since 2011, then bond yields should drop back down. This would make equities appear more attractive, support share prices, and perhaps ward off a stock market crash in the short term. If inflation remains under control, that’s great news for UK shareholders. Prices might even climb higher, considering the UK100 is still below its pre-pandemic high. However, if inflation does happen, then things could turn ugly fast for stock markets Globally.
So in Conclusion.....
None of us want a stock market crash to happen, not least because many investors are holding some great gains from last year, but I think the best place to invest today isn’t in richly priced Nasdaq stocks. When buying prices are so high, this lowers future returns. Happily, the UK stock market is trading at levels relative to the US not seen in half a century. I see the UK100’s big players as offering outstanding value for patient investors. That’s why I’m buying cheap shares like Vodaphone (VOD), BT Group (BT.A), Avila (AV) and Legal and General (LGEN) now.