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As the FTSE 100 dips below 6,000 points, is a new crash just starting? Here’s what I’d do

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The FTSE 100 on Tuesday morning showed a sea of red. Only 19 stocks in the entire top London index are in positive territory at the time of writing. The index itself has dropped below 6,000 points again, reaching as low as 5,880.

The Footsie previously dipped below the 6,000 level on 31 July, but we have been seeing a slow decline since 5 June. Having reached 6,490 on that day, the index has since declined by 9.4%. The speed of the early recovery from the Covid-19 stock market crash did surprise me, as I expected a long and drawn-out weak spell.

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Nearly half of Tuesday morning’s few FTSE 100 gainers are miners, with Fresnillo in the lead on a 5.7% rise. That could be defensive investing, as I see mining and commodities stocks as good ones to hold for the very long term. Those who buy them don’t mind cyclical ups and downs, and don’t fear short-term volatility.

FTSE 100 losers

At the other end, Rolls-Royce lost 9% in early trading. That continues the slide triggered by last week’s announcement of a £5.4bn pre-tax loss for the first half of 2020. With the aviation industry devastated, investors clearly think Rolls has more pain ahead of it.

Speaking of aviation, International Consolidated Airlines shares are down 6.5%. That’s the second biggest fall of the day as I write. I can see restrictions on air travel, and their unpredictability, being with us for some time to come.

Unsurprisingly, financial stocks are among the FTSE 100 fallers, with Lloyds Banking Group, NatWest Group and Barclays all in the bottom 10. And there’s a handful of insurers down there too.

What should we do?

I don’t know if this is the onset of a new stock market crash, or if the FTSE 100 will drop again to the levels seen in March. But I say we should always prepare for a stock market crash just round the corner. I think there’s a key approach to dealing with one when it happens, and it echoes an essential of investing in general.

What if a stock you hold, or one that you’re watching, either falls heavily or climbs sharply? The key thing is to find out whether it has changed fundamentally. Never mind the share price, never mind the FTSE 100, what’s happened to the company itself?

Fundamental change?

If its business has been changed fundamentally in some way, then you should re-analyse it from scratch. So throw away everything you know about, for example, airlines. Covid-19 has materially changed the business, so you just can’t value airline stocks the old way any more. If you think they’re good value in the light of the dire outlook for the business, then by all means buy.

By contrast, you might decide that your favourite FTSE 100 companies are structurally sound. They might have fallen simply as a result of the general downturn, but are still strong enough to prosper in the long term. In that case, it might be time to buy. And if there’s one thing a stock market crash does, it’s present us with good companies at cheap prices.

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Alan Oscroft owns shares of Lloyds Banking Group. The Motley Fool UK has recommended Barclays, Fresnillo, and Lloyds Banking Group. 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.

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