After falling by more than 2% on Monday, the FTSE 100 is bouncing back. The big-cap index is up by 1.6% to 6,994, as I write.
As a long-term investor, I don’t usually worry about minor market wobbles like we’ve seen this week. But I am always looking for signs the stock market might be about to experience a real crash. Do I need to be preparing for trouble over the coming days and weeks?
What’s really happened this week?
Monday’s sell-off was blamed on fears that Covid-19 may yet cause more disruption for businesses. But, in reality, I think Monday’s move lower was really the tail end of a sell-off that’s seen a number of popular reopening stocks slump over the last month.
For example, jet engine maker Rolls-Royce and British Airway owner IAG have both dropped 10-15% over the last month. Catering group Compass is also down.
In my view, what we’ve seen is simply a period of consolidation after strong gains for these stocks. I suspect that investors are recognising they’d become priced for perfection when, in reality, a full recovery is likely to be gradual.
I expect to see further volatility over the coming weeks, but I don’t think these reopening stocks are likely to cause serious problems.
FTSE 100: too cheap to crash?
The FTSE is up by 12% compared to one year ago. If we measure the market performance from the low point seen during in March 2020, then the FTSE 100 is up by around 35%. That’s quite a modest gain compared to some other markets, especially in the US.
The US S&P 500 index has risen by more than 30% over the last year and is up by more than 85% from the lows seen in March 2020.
From these numbers you might think UK-listed companies have underperformed their US rivals. In isolated cases, that might be true. But I think the truth is simpler — the UK stock market is cheaper than the US market.
The latest information I can find shows the FTSE 100 trading on an average of about 19 times earnings, compared to 26 times earnings for the S&P 500. This valuation discount is one reason why we’re seeing a lot of US private equity firms bidding for UK companies at the moment.
I don’t expect a crash
The main risk I can see is that economic conditions will weaken over the coming months. Europe, the US, or perhaps China, could report a slowdown. In those scenarios, I think we could see a corresponding market slump.
However, I don’t see any reasons to expect this at the moment. Interest rates seem likely to stay low. Meanwhile, government support programmes seem to have prevented surging unemployment and recession.
Corporate earnings and dividends are expected to rise this year in most sectors. Western economies seem to be stable.
I think we’ll probably see some market volatility over the coming months. But I don’t think the FTSE 100 is likely to crash unless something big and unexpected happens.
