I won’t waste the next stock market crash

The US banking crisis appears to be over now, and so far we have avoided a complete stock market crash. When in FTSE 100 it is down about 500 points from the last all-time high of just over 8,000 in February, which is a drop of only 6% and does not qualify as an accident.

Regulators acted quickly to prevent a repeat of the great financial crisis of 2007/08, but markets remained unsettled. You have to remember that the financial crisis was not over and done with over the weekend, but it took about 18 months for the event to happen.

I will buy cheap stocks if they crash

I don’t expect a disaster of the same magnitude this round. UK regulators have been working hard to build resilience in our banking sector. But I still think 2023 is going to be bumpy, and selling cannot be ruled out next week.

Monetary policy has reversed itself in the past year or so. The era of cheap money is now over, killed by today’s turbocharged inflation. Interest rates have rocketed from near zero to nearly 5% in the US. Until last week’s event, investors expected a peak of at least 6%.

I cannot overstate how big this change is. Growth companies, especially in the US technology sector, are accustomed to tapping into the flow of cheap venture capital, which can be used to finance rapid expansion. That is now dry for three reasons.

1. Borrowing money is more expensive now. Startups need to make a better investment case as capital costs add up.

2. Today’s extremely high rate of inflation will reduce the value of the company’s future profits significantly. This is another reason for investors to be cautious.

3. Yield increases. Why gamble money on growth stocks when investors can get 4% a year from a low-risk bond?

Stick times ahead

Consumer price inflation is proving sticky, particularly in the UK which was 10.1% in January. It fell to 6% in the US during February, but core CPI, which excludes volatile food and energy prices, actually rose 0.5% to 6%.

This leaves the central bank between a rock and a hard place. A further increase in interest rates can curb inflation but at a high price. Fighting inflation without causing a stock market crash may be beyond the US Federal Reserve and the Bank of England.

But I’m not afraid of a stock market crash. However, I prepared one. And no, I don’t mean stocking up on canned food and ammo, I mean stocking up on cash. That way if the stock price falls, I can take advantage by buying more of my favorite stock at a reduced price.

There are plenty of top FTSE 100 stocks I’m interested in right now. BT Group, Legal & General Group and Unilever high on my shopping list. All three look good value right now, but may look even more tempting if stocks fall.

If we get a stock market crash this year, I have absolutely no intention of wasting it. I will be loading up on bargain stocks when I can.