The current bear market for shares is shaping up as a big event. But even though FTSE 100 shares have fallen a long way already, two things raise the possibility that some stocks could yet have further to sink, perhaps much further.
Cyclicals tend to plunge the most
The first is that the bear market that started in the middle of 2007 following the credit crunch ran for much longer than today’s has, so far. And the second is that some shares with cyclical underlying businesses back then fell as much as 90%. And despite the falls we’ve seen already this time, not many big-name shares have yet plunged that far.
For example, plumbing and heating products distributor Ferguson (LSE: FERG) saw its share price starting to fall around 1 June 2007. But the bottom of that move didn’t arrive until 20 months later in February 2009. By then, the stock was changing hands at prices around 85% lower.
And Barclays (LSE: BARC), the well-known banking group, took 21 months to complete its bear move. From 1 June 2007 to 1 March 2009, the stock fell by around 86%. Meanwhile, Persimmon (LSE: PSN) the housebuilding company, dropped by around 82% between 1 June 2007 and 1 December 2008, a period of 18 months.
The stock market can be intelligent
The stock market can be quite an intelligent beast. It is after all the sum of all participants in the market — that’s a lot of minds aiming to predict the future. And I reckon the recent market-move is signalling general economic weakness ahead. Meanwhile, these three cyclical companies have so far escaped with quite modest down-moves compared to those at the time of the credit crunch and the recession that followed.
Since the down-moves began around 21 February, at 5,504p as I write, Ferguson has plunged around 27%. And at 2,151p, Persimmon is 34% lower. Barclays has fared the worst. At 98p, the stock has fallen around 46%.
Meanwhile, City analysts have yet to seriously dig into marking-down forward-looking forecasts regarding earnings for these firms. When, and if, they do that, I reckon we could see further falls. And I believe the coronavirus pandemic has the potential to tip the world into a prolonged recession.
Great potential ‘buys’ for later
Despite plunging share prices now, I reckon Ferguson, Persimmon and Barclays could be decent vehicles for riding the next up-leg in the markets. Cyclical shares like these move down quickly when the outlook is grim, but they can also climb out of their holes over many years, often exceeding previous highs.
So, right now, I’d ignore cyclical shares and focus on less-cyclical, high-quality defensive stocks in my search for share bargains. But later, when the markets begin to turn back up, I’ll be watching the likes of Ferguson, Persimmon and Barclays closely with a view to buying some of their shares because I think they’ll likely go on to outperform their index.
Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended Barclays. 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.