On Monday, investors made their feelings clear regarding the UK’s ‘Freedom Day’. The FTSE 100 index closed down 164 points (2.3%) at 6,844.39. This took the index below the psychologically key 7,000 mark, making some investors nervous. In a broad-based decline, only four out of 101 Footsie stocks closed up, with two shares unchanged. Forty stocks fell between 3% and 6.6%. Among the FTSE 100’s biggest fallers were cyclically sensitive shares, including banks, insurers, energy, and airline stocks.
The FTSE 100 is showing weakness
At its 52-week low on 28 October 2020, the FTSE 100 dipped to 5,525.52 points. However, after ‘Vaccine Monday’ (9 November 2020), the index soared as vaccine optimism grew. At the index’s 2021 high, it hit 7,217.54 on 16 June. This rebound lifted it by over 1,690 points — a gain of nearly a quarter (23.4%) in seven months.
However, the FTSE 100 has shown signs of weakness since mid-June. Since its recent peak, it has dropped almost 375 points, a decline of 5.2%. Is this just stocks’ usual summer swoon, or the start of a sustained slump in share prices? The main cause of the market’s latest swoon is worries over the more transmissible Delta variant of Covid-19 (one of three risks I warned about just last Friday). So, should investors have sold in May and gone away, as the old City saying goes? Who can say? Nevertheless, the index lies stubbornly below its all-time high.
On 22 May 2018, the FTSE 100 peaked at a record intra-day high of 7,877.45 points. Thus, the Footsie today trades at a discount of over 1,030 points from its top over three years ago. Meanwhile, indices in the US and Europe have repeatedly made record highs in recent months. Indeed, the all-time high for the US S&P 500 index came just last Wednesday (14 July), when it hit 4,393.68 points in intra-day trading. But US stocks look pricey by historical standards, with earnings yields at lows not seen since May 2009, when the global financial crisis was abating.
The Footsie looks cheap to me
For me, the good news is that falling share prices are a bonus, because my family portfolio is still in its ‘accumulation’ phase. In other words, we use excess income, dividends and gains to buy more shares to fund our retirement. Thus, when share prices fall, I don’t get too worried. Instead, I see periods of market weakness as opportunities to top up on more shares at lower prices.
What’s more, the FTSE 100’s forecast fundamentals suggest that it offers decent value to patient investors like me. The index has a 2021 forecast price-to-earnings ratio of 14.6, an earnings yield of 6.8%, and a dividend yield of 3.7%. Pushed out into 2022, these figures are 14, 7.2%, and 3.9%. Frankly, that’s way cheaper than almost other any major market. That’s why I view cheap UK shares as the standout bargain in world stock markets.
Of course, I could be wrong. The ‘road to de-mask us’ (haha!) could be long, winding, and tricky to navigate. As coronavirus spreads and evolves, even more potent forms might emerge. Should hospitalisations and deaths rise too high, we might be forced into winter lockdown #2. Obviously, this economic setback would likely hit share prices brutally hard. All the same, I remain optimistic right now about the FTSE 100’s future returns. That’s why I’ll keep buying as the blue-chip index dips and dives!
