Is this the start of the next stock market crash?
A few days ago investors were celebrating the FTSE 100 hitting an all-time high, now they’re worrying about a stock market crash. It’s quite a reversal but not unusual. Such are the highs and lows of equity investing.
The FTSE 100 has fallen 1.16% today, largely in response to Tuesday’s Wall Street sell-off. The US S&P 500 index fell 2% yesterday, its worst performance in two months.
Worried? No, I’m buying shares
Investors across the pond are concerned that interest rates will have to stay higher for longer, as inflation is stickier than the US Federal Reserve would like.
The FTSE 100 suffered further damage after mining giant Rio Tinto announced a 38% drop in profits, and slashed its (very generous) dividend by more than half. Rio’s share price is down 2.77% as I write this.
Lloyds Banking Group has dropped 2.08% after reporting flat profits in 2022. Although at £6.93bn they were still sufficiently juicy to trigger renewed calls for a windfall tax on ‘excessive profits’ in the banking sector.
Given that Lloyds also hiked its dividend 20% from 2p to 2.4p and announced a £2bn share buyback, I think the sell-off was overdone.
The sharp shift in sentiment has knocked the FTSE 100 back below 8,000. I’m not exactly surprised. Markets never rise in a straight line. After a good run lasting several months, a pull-back was pretty much inevitable.
Despite this week’s slippage, the FTSE 100 is still up 4.48% year-to-date and the S&P 500 has climbed 4.53%.
Investors had raced ahead of themselves as they jostled to take advantage of the long-awaited Fed interest rate ‘pivot’. Now they’re having a much-needed bout of realism.
Will markets fall further? Yes, if I believe Michael Wilson, chief US equity strategist at Morgan Stanley. He reckons markets have entered the “death zone”, a term mountaineers use when they climb so high it’s hard to breathe.
Wilson reckons we’re there today, and the S&P 500 could tumble to 3,000 within months, a drop of 26% from current levels.
I’m not scared of a FTSE 100 crash
While the FTSE 100 has outperformed the US over the last year or so, in that doomsday scenario it would almost inevitably crash too.
I feel like I should be worried, but I’m not. First, there’s always some analyst predicting a market meltdown, and Wilson is a renowned bear. Also, over the years I’ve learned to see a stock market crash as a buying opportunity rather than a threat.
Last October, when the index was below 7,000, I went on a FTSE 100 shopping spree, and have enjoyed the subsequent rally. I wouldn’t mind another opportunity like that, especially as I’ve been building up my cash reserves.
Also, I suspect if shares do crash, this will be the final leg of the downtown that began in 2022. Things could look brighter after that, and quickly.
But who knows? I don’t. Michael Wilson doesn’t. Stock markets are entirely unpredictable, except in one respect. Over the longer run, history shows they make investors richer, provided they last the course and resist the temptation to panic-sell when things get a bit shaky. That’s the last thing I’m going to do, despite today’s dire warnings.
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Harvey Jones has positions in Lloyds Banking Group Plc and Rio Tinto Group. The Motley Fool UK has recommended Lloyds Banking Group Plc. 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.
Motley Fool UK 2023