Be ready for a violent stock market crash

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The stock market’s performed well recently. And looking ahead, most experts expect the good times to continue, given that economic growth is solid and artificial intelligence (AI) is enhancing productivity.

However, there’s an issue on the horizon that’s starting to concern me. I’m worried that this could be the catalyst for a violent stock market crash in the not-too-distant future.

A new risk for investors

It’s all to do with AI. And more specifically, AI-related job losses. In recent years, this technology’s come a long way. And it’s now starting to replace human jobs.

For example, in January, global chemical powerhouse Dow Inc announced 4,701 layoffs, explicitly citing AI-driven automation in its operations. Meanwhile, Amazon announced 16,000 layoffs, partly due to AI efficiencies.

Could 2027 be the year when mass layoffs start? Potentially.

What happens then? Could we be potentially looking at a huge drop in consumer spending at some stage? That could be ugly. In the US (the world’s largest economy), consumer spending drives roughly 70% of GDP.

I’m concerned that uncertainty over job losses and consumer spending could result in downward pressure on stocks. If investors go into panic mode, we could see a violent move lower, given the big gains registered in recent years.

What I’m doing now

Now, I’m not saying that investors should go and sell all their stocks today. Because things may not play out this way (I could be totally wrong about AI job losses). But I think it’s worth giving some thought to overall asset allocation and portfolio diversification right now.

It could also be a good time to start building up a cash pile. That’s what I’m doing personally. Given the run that markets have had, I’m aiming to boost my cash pile to 20%+ of my overall investment portfolio. That way, I’ll have options if there’s a stock market crash.

Rare buying opportunities

It’s worth pointing out that a crash could present some amazing buying opportunities for long-term investors. For example, there may be a chance to buy shares in Rolls-Royce Holdings (LSE: RR.) at a much lower price.

This stock has had an incredible run over the last three years. As a result, it now trades at a very high valuation – the forward-looking price-to-earnings (P/E) ratio’s near 40.

That valuation’s too high for me personally. But if the stock were to come down significantly in price, I could be interested in snapping it up for my portfolio.

Because I see a lot of growth potential given the company’s exposure to defence and nuclear energy. These markets look set for strong growth in the years ahead given the complex geopolitical backdrop.

Of course, a large chunk of Rolls-Royce’s business is the manufacturing and servicing of engines for the civil aerospace market. If we were to see a major drop in consumer spending, this side of the business could be impacted negatively.

Overall though, I think the company has a lot going for it. So it’s on my ‘stock market crash watchlist’.

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