The FTSE 100 index is up by 1% as I write today. This is encouraging after some weakness seen recently. However, I find myself wondering if this latest market buoyancy can continue. There is a whole lot going on with the UK’s macro-economy, not to mention with regards to the pandemic. These could be creating a perfect storm leading to a total market meltdown very soon. 

Covid-19 situation worsens

Consider this. News flow on the Covid-19 situation is only getting worse. We always knew that winters were going to be bad, as the virus tends to spread faster during this time. But now we also have the Omicron variant in the mix. In the past month we have seen travel restrictions, calls for caution during our festive celebrations, and even speculation of another lockdown as coronavirus cases rise. I think this in itself is a recipe for a potential market meltdown of the kind we saw in March 2020, when the FTSE 100 index fell by more than 10% in a single day. 

Weak economic recovery

But there is more as well. The recovery is quite weak. On a monthly basis, the UK economy barely grew in October. This only adds another data point to the fact that it has already been relatively lacklustre after the lockdown was lifted. I reckon that this was at least partly due to the fact that some of the government support measures are being withdrawn. 

For instance, I do not think that it is a coincidence that the stamp duty holiday is being rolled back and the construction output fell in October compared to the month before. The segment can be seen as a loose proxy for housing development, and the housing market benefited hugely from government support starting last year and up to recently this year. While some segments of the economy are still doing quite well, I think this does not bode well for FTSE 100 property developers. And in general a weak recovery bodes poorly for companies, and the stock markets as well.

Inflation is heating up

Next, inflation continues to be a big challenge across companies. Yesterday’s print came in at an awful 5.1% for November on an annual basis, prompting the Bank of England to hike interest rates to 0.25% today. While inflation was widely expected to remain elevated, I doubt if anyone saw such a big increase coming so soon. The fact that the number is at an over 10-year high puts it into perspective. 

Rising inflation means that either companies absorb costs and shrink their margins or they pass on the costs to end consumers and risk losing some revenues. Either way, it is not a positive situation. And it could impact FTSE 100 stocks pretty much across the board. If it starts showing up in weaker results, the stock markets could conceivably crash. 

What I’d do in a stock market crash

I am quite optimistic still, though. The situation might just be contained soon. And a stock market crash, if it happens, could be a great buying opportunity as many of us discovered last year. And if one happens again, I am ready to invest my money in high quality FTSE 100 stocks then. 

The post A stock market crash is coming. Here’s why appeared first on The Motley Fool UK.

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Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.