This year’s stock market crash is one that’s already set to go down in history. The speed and depth of the sell-off haven’t been seen for over a decade, if not longer.
But for investors like myself, the sell-off does offer good buying opportunities for firms I fundamentally believe in. It requires a slight tweaking of my investment strategy — I’m currently adopting a drip-feed ‘pound costing averaging’ concept. I wrote about this in more detail here, showing how it can help during a falling market.
A question I’ve been asked a lot this week is when I think this crash will end, and where will the FTSE 100 index be at the lowest point. Needless to say, these are impossible questions to answer. However, there are some factual points we can agree on when looking at the FTSE 100. These give us an indication that the crash may be nearly over.
We’ve hit earlier stock market crash percentages
During the market crash in the early 2000s, the FTSE 100 fell from circa 6,300 points at the beginning of 2001 to a low of around 3,300 points. That was a 48% drop. In 2008, the market traded from 6,000 points down to 3,500 points, a 42% fall. For 2020, we went from trading at 7,550 points down to a close on Friday around 5,000 points. This amounts to 34%. If history repeats itself, then we should only be around 10% away from a market bottom.
The index is flagging as oversold
The relative strength index (RSI) is a technical equation that seeks to help investors see when a stock or stock index is overbought or oversold. It gives a number between 0 and 100, with a normal stock being between 30-70. Above 70 is overbought, and below 30 oversold. Currently the FTSE 100 index is at 16 on a weekly basis, lower than 2008 and 2001. On all previous occasions, the market has eventually returned back within the 30-70 band.
Constituents are at historically low P/E ratios
Within the FTSE 100 index, a key metric of valuation is the share price of a firm relative to its earnings. For the past decade, the average has been around 15 times earnings, with different sectors being above or below this. Currently the average is 11 times, putting it at a 26% discount to the longer-term average. Some firms currently have a P/E ratio below 5, including Glencore, WPP and Carnival.
UK Government fiscal stimulus
Over the past week, the Chancellor of the Exchequer has announced huge funding via the Coronavirus Job Retention Scheme. This seeks to pay up to 80% of furloughed wage costs, among other things. Further, a three-month deferral of VAT, the ability for businesses to reclaim statutory sick pay, and many other initiatives, are there to help ease business liquidity pressures. These will benefit all firms, including large employers within the FTSE 100 index.
From these takeaways, I personally think that the market is nearing a bottom for the current crash. For me, this means it’s time to invest. Some firms I’m eyeing up to buy are talked about here, and they have good long-term prospects, in my opinion.
