Stock markets the world over have seen large moves lower over the past week. The FTSE 100 index has been one of the worst hit, with the index falling over 13% last week.
The main driver behind this move lower has been the escalation of the coronavirus, and its global spread. Here in the UK, the number of confirmed cases stands at 40 as I write, according to a major news source. The potential impact and disruption it could have on businesses, from the airline sector to manufacturing, could be large and so the sell-off in the market is reflective of this concern from investors.
Despite this, last Friday I bought a FTSE 100 tracker fund when the index stood at 6,500 points. I think this was a good long-term buy, and while some may think it crazy, there are several reasons why I disagree.
Having been around financial markets for a long time, buying when the market is already high does not sit too easy with me. Companies can trade at expensive P/E ratios, and can become overbought simply due to hype. Although not a UK-listed company, Tesla in the US was a good example of this seen only last month.
For me, buying when the market is falling (a dip) is a much better long-term strategy as it allows me to buy-in at cheaper prices, with the index at levels not seen since 2016. While I am buying a tracker that simply mimics the performance of the sum of the individual companies within it, it still allows me to benefit from those companies being undervalued.
Should we see a rebound in sentiment over the next few weeks, certain firms will perform better than others, but ultimately the FTSE 100 as an index should rally.
Another reason why I bought last week was that panic selling, which leads to market corrections, can often cause a disconnection between the actual value of a stock/index and the fair value of it.
For example, the FTSE 100 index was last at 6,500 points just after the EU referendum in 2016. Do I think that the broader UK economy and the top 100 firms within it are in a better, more advanced position than four years ago? Absolutely!
I recently wrote about some firms within the banking sector that are adapting with new technology, which gives those firms a better foundation going forward to be more sustainable. I would therefore value these companies with a higher share price than four years ago.
Yet the shares of those firms, and the index as a whole, have been sold-off so much that prices are back at those levels of four years ago. To me, this is a disconnect based on fear. And while it may take some time to settle down, I fully expect the market to return to a longer-term fair value, which according to my calculations, is currently around 7,400.
Jonathan Smith and The Motley Fool UK have no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.