Earlier in July, the UK stock market’s flagship index, the FTSE 100, broke through the 9,000-barrier for the first time. Since July 2024, it’s risen 11%. Looking back five years to July 2020, when the pandemic was causing havoc, the index was just over 6,000. So far in 2025, the UK’s largest 100 listed companies have outperformed the S&P 500.
And yet the UK economy appears to be struggling. The most recent monthly data for growth, inflation and unemployment reported movements in the wrong direction. To make matters worse, June’s government borrowing was at its highest level since the ‘Covid years’. Most economists appear to agree that tax rises will be needed in October’s budget.
A global view
This apparent contradiction is partly explained by around 80% of the revenue of Footsie companies being earned overseas. This means they are not entirely dependent upon the domestic economy.
But there are also plenty of examples of, for example, US companies trading at historically high multiples. The S&P 500’s a fraction off its all-time high and has recovered all of its post-‘Liberation Day’ losses. Yet, JP Morgan’s warned there’s a 40% chance that America will have a recession this year.
History will repeat itself
Against this backdrop, I’ve been looking at the history of stock market corrections. A ‘correction’ is defined as a fall of 10-20% from a recent high. It shouldn’t be confused with a ‘crash’.
Research by Artbuthnot Latham shows that, since 1986, there have been 22 FTSE 100 corrections compared to 14 on the S&P500. According to the investment manager, it’s taken anywhere between 47 days and six years for the UK index to recover its losses. The average timeframe is 336 days.
If the economy remains sound — and there’s no sign of corporate profits shrinking — then Artbuthnot Latham advises doing very little. Unfortunately, there’s nothing that can be done to reliably predict the timing of these corrections. The only certainty is that there will be many more to come over the remainder of my investing lifetime.
Taking action
If an investor believes a correction’s imminent, one option is to invest in more defensive stocks. These are, generally speaking, relatively immune from an economic slowdown.
Utilities and supermarkets, including Tesco (LSE:TSCO), are good examples.
According to data from Kantar, since July 2020, Britain’s largest supermarket has retained its market share at 26.5-28.5%. Over the same period, the combined share of so-called discounters Lidl and Aldi has increased from 13.9% to 19.2%. To paraphrase Mark Twain, reports of Tesco’s death have been greatly exaggerated.
But food retailing’s tough. The market’s highly competitive, price-conscious customers are often disloyal and margins are thin.
However, I think Tesco’s in good position to cope with whatever’s thrown at it. It’s predicting free cash flow of £1.4bn-£1.8bn this year. And at 6.3%, its five-year growth rate in earnings per share comfortably beats that of, for example, J Sainsbury. Also, its dividend yield’s pretty much in line with the FTSE 100 average.
For these reasons, I think Tesco’s a stock that investors fearful of a market correction – and others too – could consider adding to their portfolios.
