Since the stock market crash in March, the FTSE 100 index has recovered remarkably well. At the start of the week, the index was trading around 6,500 points. This is still down over a thousand points from the start of the year, but it’s certainly better than when it traded below 5,000 points in the first quarter.
If you’re a regular reader of content on The Motley Fool, you’ll have noticed a number of articles talking about a second stock market slump recently. In the short term, there was a lot of rational thinking that the rally was getting ahead of itself, given the disconnect between the FTSE 100 and broader economic conditions. Yesterday we may have seen the start of this market crash, with the FTSE 100 shedding 223 points in a single session, to trade down at around 6,100 points.
Disconnected
Any good investor keeps a finger on the pulse of the market and compares it to what the situation is like in the broader economy. If there’s a large disconnect, then something isn’t quite right. Over the past few weeks, the FTSE 100 has been performing exceptionally well. But there have clearly been issues regarding the UK (and world) economy. We’ve had figures out today showing that GDP fell by 20.4% in April, a staggering number. We’ve also had escalating tensions between the US and China and fears over a second wave of the coronavirus internationally.
As a logical thinker, it seems a second stock market slump in the near term could be here, in response to the above. So here’s what I’m doing.
FTSE 100 slump action plan
Firstly, I’m making a wish list of stocks that look attractive to me for the long term. For example, Rolls-Royce has been on my list for the past month or so. I could have bought it earlier this week, but since Tuesday, the share price is down 17%. The second slump has already provided me with a great discount to buy the firm at. I’ll monitor news for the next week or so, but this looks like a good opportunity to buy the dip in the market.
Further, I’m looking at my overall allocation within my portfolio again. Interest rates are still at low levels (0.1%) and the commentary coming out of the Bank of England isn’t positive. I doubt interest rates will be moving higher any time soon. So with a second FTSE 100 slump looking apparent, it makes sense to move out of cash and into stocks.
For this I’d be looking at making my cash work harder for income, so would be targeting safe dividend paying shares. I recently wrote about Vodafone, which showed a year-end operating profit of €4bn. With ample cash flow, the dividend yield of over 5% looks a good home for income hunters. A second market slump will only increase the dividend yield.
Stay invested
Finally, for stocks I’m already in the red on thanks to the first market crash, my action plan is to stay invested. The second slump may hit hard in the short term. But in the long term, history shows that patience is always rewarded!
