An imminent stock market crash? Rubbish!

After reaching a dizzying height of 8,000 points in February, the FTSE 100 has moved lower over the past month, or so. At 7,500 points, it has been a quick correction, leading to some ringing the warning bell for the looming stock market crash.

Granted, I think it will be a while before I hit 8,000 points again. But this is why I don’t think the crash is imminent.

Old information is not a new trigger

Let’s count what we’re talking about. A market correction is when a stock falls by around 10% over a period of weeks/months. Crashes usually appear to be larger (perhaps 20%) and over a shorter period of time. As was the case with the crash in 2020, it could happen very quickly.

When I look back at the market crash, one point I remember. Investors were caught. Back in 2008/2009, revelations about the banking sector caused panic, with stocks falling. In 2020, it is the outbreak of Covid-19 and the shock that has spread throughout the world.

Now, some say that continued interest rate hikes and inflation will spell doom. But I am struggling to see this is possible. Simply put, this is not a surprise to investors. That is not new information to digest. We are all aware of the impact of interest rates and the pressure they have placed on the global economy.

Of course, if we get some new trigger to worry about (maybe Russia attacking a NATO country, or China attacking Taiwan) then I’ll have to think again. But as it stands now, I don’t see how we’ll be surprised by this common knowledge.

The market is not overvalued

Another reason I’ve heard that could cause a market crash is that the FTSE 100 is too high. At 8,000 points, it was celebrated as an all-time high. To some extent, I was a little puzzled by the general meeting to this level, given the current situation in England.

The FTSE 100 has shed 500 points since then, which is a healthy correction from overeager buying. At the same time, I’m struggling to see a crash from here because the market isn’t cheap.

The metric I look at is the price-to-earnings (P/E) ratio. I can use this at the company level, but it also looks at the average for the entire FTSE 100. At the moment, the P/E ratio is 10.6. This compares to a five-year average of 15.2 and an average from the past decade of 16.3. So what is the current level of shares that are overvalued in value? I don’t think so at all.

Be flexible

The world changes quickly, and if we get new information that causes havoc, I have to make adjustments. For my portfolio, I will invest in defensive stocks such as utility companies and supermarkets.

Until that happens, I like to keep investing small amounts on a regular basis. Historically, the long-term market trend is higher.