Another stock market crash is inevitable, but I’d buy this ‘safe’ FTSE 100 share today!

How long can share prices defy gravity, when American Covid-19 rates are so high? But if a stock market crash comes, I think this share might survive.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I’ve been following financial markets since the mid-80s and investing in shares since 1987. Over 33 years, I’ve witnessed every major and minor FTSE 100 crash since it was created in 1984. After every stock market crash, share prices recovered, got too high and the bubble burst again.

Another US stock market crash?

I think another stock market crash is inevitable. Indeed, its seeds may already have been sown. I think that share prices are far too high – but not necessarily on this side of the Atlantic.

It’s when I look at the US that I see some of the strongest cognitive dissonance I’ve seen in a third of a century of investing. As I write, the S&P 500 index hovers around 3,339 points. That’s just 47 points (1.4%) below its all-time closing high of 3,386 on 19 February.

Stock market crashes generally happen when prices reach elevated (and unrealistic) levels, as I believe is the case in New York today. How can the S&P 500 be so strong, when the US economy shrank by an annualised 32.9% in Q2? And when US unemployment was 10.2% in July, versus 3.5% in February?

When company valuations get detached from underlying economic reality, that’s when I most fear stock market crashes. Hence, I’m expecting another steep downturn in gravity-defying US stocks.

A UK stock market crash?

As for the probability of a UK stock market crash, I’m not so sure. Share prices here aren’t anywhere near as expensive as in the US. What’s more, the FTSE 100 index has a healthy dividend yield nearing 4% to help underpin current valuations.

The FTSE 100 is a long way away from previous market peaks. On Friday, it closed at 6,032 points. Here’s a list of four previous pre-stock market crash closing highs for the UK’s blue-chip index:

20th Century high: 6,930 (31/12/99)

Pre-GFC (global financial crisis) high: 6,732 (15/06/07)

All-time high: 7,877 (22/05/18)

2019/20 high: 7,675 (17/01/20)

Today, the FTSE 100 is way down on these major market highs. That’s one reason why I don’t see it as crazily overvalued.

Then again, when the American market sneezes, the UK market catches cold. If the S&P 500 does take a steep dive, I would expect the FTSE 100 to follow suit. Likewise, if Brexit goes badly, UK investors should hang on to their hats.

This share might survive the Apocalypse

As you might have grasped, I’m nervous about another market downturn. That’s why, for the past four months, I’ve focused on picking solid value shares from the FTSE 100. What I’m after is a wide margin of safety, so I don’t lose too much if my picks go awry.

Earlier this week, life insurer Legal & General Group (LSE: LGEN) released its latest results. I was mightily impressed with how this FTSE 100 firm had navigated this year’s stock market crash.

At Friday’s closing price of 227.2p, L&G shares are down 4.4% in the past 12 months. This values the group at £13.4bn, so it has size to add to its strengths. L&G shareholders must be asking, “Crash? What stock market crash?”, as the market meltdown has hardly hit their holdings at all. Then again, L&G shares did slump to 138p on 19 March, but have rebounded almost 65% since.

For me, L&G shares are a big buy, as they trade on a price-to-earnings ratio below 11 and offer a 7.8% dividend yield. I think it will take a lot more than a coronavirus-induced stock market crash to drag this share into the dirt!

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has 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.

More on Investing Articles

Investing Articles

I’d buy 1,784 shares of this FTSE 100 stock to target £350 of monthly passive income

Muhammad Cheema takes a look at how British American Tobacco shares, with a dividend yield of 10.1%, can generate a…

Read more »

White female supervisor working at an oil rig
Investing Articles

1 ex-FTSE 100 stock that I think will get promoted soon

Jon Smith flags up an energy stock that used to be in the FTSE 100 and currently has strong momentum…

Read more »

Shot of a young Black woman doing some paperwork in a modern office
Investing Articles

With an 8% dividend yield, I think this undervalued FTSE stock is a no-brainer buy

With an impressive yield and good track record of payments, Mark David Hartley is considering adding this promising FTSE share…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

£9,500 in savings? Here’s how I’d try to turn that into £1,809 a month of passive income

Investing a relatively small amount into high-yielding stocks and reinvesting the dividends paid can generate significant passive income over time.

Read more »

Businesswoman analyses profitability of working company with digital virtual screen
Investing Articles

Dividend star Legal & General’s share price is still marked down, so should I buy more?

Legal & General’s share price looks very undervalued against its peers. But it pays an 8%+ dividend yield, and has…

Read more »

Investing Articles

Dividend shares: 1 FTSE 100 stock to consider buying for chunky shareholder income

This company’s ‘clean’ dividend record looks attractive to me and I’d consider buying some of the shares to hold long…

Read more »

Investing Articles

3 of my top FTSE 250 stocks to consider buying before April

Buying undervalued UK shares can be a great way to generate long-term wealth. Here, Royston Wild reveals a handful on…

Read more »

Ice cube tray filled with ice cubes and three loose ice cubes against dark wood.
Investing Articles

Just released: our 3 top income-focused stocks to buy before April [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »