The FTSE 100 had a wobble on Tuesday, and was trading more than 2% lower by mid-afternoon. Fears are growing that the real global economy won’t rebound as quickly as the stock market. If that happens, we could easily see a second stock market crash.
Today I want to take a closer look at the situation and explain how I’m handling this risk.
Peak uncertainty
We’re in the middle of a huge economic experiment. All over the world, governments are spending unprecedented amounts to try and prevent an economic collapse. In the UK alone, reports suggest that government support schemes could cost over £300bn.
What we don’t yet know is how successful these schemes will be.
The big question is whether consumer demand and employment will bounce back quickly, or whether we’re heading for a period of high unemployment and economic contraction.
Is the FTSE 100 still cheap?
The stock market crash in March signalled peak uncertainty. The FTSE 100 dipped below 5,000, a level not seen since 2010. Stocks were priced for a very bleak future. I thought that the market offered some great bargains and bought more shares for my portfolio.
Since then, the picture has become a little more mixed. The mood has changed and the FTSE 100 has risen by more than 25%. One reason for this is probably that with interest rates so low, there are few alternatives to equities. But investors have also become more hopeful that government stimulus will prevent a major recession.
The FTSE 100 is trading at around 6,355 at the time of writing. This values the UK’s largest listed companies at just under 15 times their collective earnings.
In my view, this is probably high enough, given that corporate earnings are likely to be pretty grim in 2020. For some businesses, 2021 could be difficult too.
If investors get spooked by poor profit figures during the second half of 2020, share prices could fall sharply.
Stock market crash v2? I’m not selling
We could see another stock market crash later in the year. Or we might not. At this point, there’s no way to be sure.
If you’re concerned, one option would be to sell now and sit out the uncertainty in cash. The problem with this is that you could miss out on further rallies. You’ll also miss any dividends paid during the period when you’re in cash – despite some high-profile cuts, many companies are still paying dividends.
Personally, I’m staying invested and am selectively adding to my holdings. As a general rule, I never sell any shares to try and time the market. The only time I sell is when I’ve decided I no longer want to be invested in a business at all.
There’s an old stock market adage that says it’s time in the market that counts, not timing the market. I agree. We couldn’t have predicted the timing of March’s stock market crash or the rally that’s followed. We can’t predict what will happen next.
If you’re a long-term investor, I think the only sensible thing to do is to ignore day-to-day uncertainty and stay invested.