What a week it’s been for the FTSE 100 in the wake of the growing coronavirus crisis. From a few points above 7,400 at the end of the previous week, the index dipped below 6,500 points on Friday. That’s a 12% fall in a week, which is huge.
Could it get worse? If we see anything close to the same bearishness next week, I wouldn’t bet against the FTSE 100 dropping below 6,000 points.
But what should we do about it? I say the first thing we shouldn’t do is what everyone else seems to be doing. So don’t panic.
Whenever stock markets are hit by some sort of catastrophe, two things happen that I think those with calmer heads should avoid.
Indiscriminate
Even if there’s a genuine threat, investors tend to sell off everything regardless.
Look back at the banking crisis. Banks and other financial institutions were hit hard, and many still haven’t recovered to this day. But shares in hundreds of other companies saw big falls too. And that includes many that were not harmed by the financial crisis in the slightest.
If the coronavirus threat is not contained and we suffer a full-blown pandemic, do you really think that will damage the long-term business of Royal Dutch Shell? I don’t. I think the world will be just as hungry for energy this year, next year, and in five years time as if the virus had never emerged.
And what about, say, AstraZeneca and GlaxoSmithKline? Will the world stop needing drugs for all of the diseases of the developing and developed world? No, of course not.
So one thing we can do is try to identify those stocks that should be resilient in the face of a pandemic. But for many, that won’t be clear.
Overselling
The second thing is that investors over-react and push prices down too far. It happens even with stocks that suffer genuine business harm, so even they can be worth buying. And whenever there’s a crash, markets invariably recover, demonstrating that we should be buying during downturns rather than selling.
There’s some rationality to the overselling and resulting exaggerated bottom, and it’s down to timing. Just knowing that shares are falling can, in itself, be enough to prompt people to sell shares. I mean, if your shares have lost 10% this week, it’s surely better to sell out before they lose another 10% next week, isn’t it?
The problem is, getting the timing right is notoriously hard. And those who try to sell when shares are falling but before they hit bottom, and buy when they’re climbing but before they reach a peak… well, they’re rarely successful in the long term.
Valuation
So what am I really going to do if the FTSE 100 drops below 6,000 points? Sorry to be boring, but I’m just going to do exactly the same as I’d do at any other level.
I’m keeping up to date with my watch list, and every time I have a suitable sum to invest, I’ll pick whichever looks the best value at the time. And if the FTSE falls, I’ll get even better value.
