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It may seem odd to worry about a stock market crash today, given that we’ve just enjoyed a good old-fashioned Santa rally. Yet there are serious grounds for concern as 2024 begins.
The FTSE 100 revived as hopes rose that inflation has peaked and interest rates will soon fall. I’m optimistic on both fronts.
Another source of optimism is the investment hypothesis known as the ‘January effect’. This suggests shares are more likely to rise this month than most others. The evidence looks a bit shaky to me, though. It largely seems confined to small-caps, rather than the larger companies that I mostly target.
It’s a real mixed bag
I’m more impressed by the fact that the global economy has proved astonishingly resilient, despite Covid lockdowns, supply chain shortages, inflation and rising interest rates. While the US and UK could fall into recession, I think a soft landing is more likely.
The S&P 500 does look expensive after last year’s ‘Magnificent Seven’ mega-cap tech rally, trading at 26.35 times earnings. However, UK shares are dirt cheap, with the FTSE 100 trading at just 9.5 times earnings. At some point, they surely have to make up a chunk of their lost value.
It’s not the economy but the geopolitics that’s the problem. So far, markets have calculated that the Israel-Hamas war will not spread beyond Gaza. That explains why the oil price has been falling lately. Yet with the US drawn into direct conflict with Iran-backed Houthi rebels, we can no longer be sure of that.
The Ukraine war seems to be going badly. A victory for Russia would be demoralising for the West. It would shift control of vital Ukraine grain supplies, which could force up food prices. It could also embolden China in its relationship with Taiwan. Alternatively, the country’s property market could collapse.
Here’s what I’ll do
The Western world needs a stable US more than ever right now. But the country faces a presidential election that could change its approach to its relationships with the rest of the world.
As an investor, I can’t do a thing about these issues. I’ve no idea what is going to happen in today’s crazy uncertain world, or the likely impact on markets. If I wait for world peace, I’ll never invest a single penny because it ain’t coming.
Probably the worst thing I could do is sell shares in fear of a coming crash, only to find it doesn’t happen. I’m not going to do that either.
Instead, I’ll do in 2024 what I did in 2023. I’ll buy dirt cheap, high-yielding FTSE 100 shares, whenever I spot an opportunity. If we do get a stock market crash in January (or February, or March…), I’ll buy even more of them because they’ll be cheaper.
Then I’ll hold for the long term, by which I mean years or decades, and carry on reinvesting my dividends for growth, until the day I need to draw them as income.
I’ll keep doing that in 2025, 2026 and beyond too, regardless of whether we get a crash, as we surely will at some point. It’s what markets do. They always recover, given time.
