UK businesses are under increased pressure from new Covid restrictions. And the economic news from Europe and the US isn’t great either. Are we heading for another stock market crash?
I don’t know what’ll happen next. But I do see some signs which suggest to me that a second crash is unlikely at the moment. I also believe that, for long-term investors, now’s a good time to be buying.
Where are we now?
The FTSE 100 is down by just over 20% this year as a result of March’s stock market crash. That’s left the index trading at around 5,900, a level last seen in early 2016.
You may remember 2016 was a pretty uncertain year too. It was the year of the Brexit referendum, after which the UK got a new prime minister. However, buying shares after the Brexit vote was generally a good move — the market rose steadily through 2017 and held onto most of its gains until the start of 2020.
What we need to know now is whether the FTSE 100 looks cheaper than it did back in 2016. In other words, has the earning power of the companies in the index improved over the last four years?
The FTSE looks cheaper to me
Digging back into the Financial Times archives tells me that, on 23 September 2016, the FTSE 100 was trading on a price/earnings ratio of 36, with a dividend yield of 3.6%. Dividend cover was just 0.76. In other words, the collective dividend payouts from FTSE 100 companies weren’t covered by their earnings.
These figures suggest profits were down at some of the big FTSE 100 companies in 2016. I suspect the main reason for this was the oil price crash in 2015/16, which caused profits to fall sharply at index heavyweights Shell and BP.
The oil market situation is similar today. But, according to FT data, the FTSE 100’s overall valuation has improved. The index now trades on 19 times earnings, with a dividend yield of 4.7% that’s covered 1.1 times by earnings.
I’m a stock market crash buyer
By nature, I’m a value investor and a contrarian. I’ve increased my share buying since the stock market crash in March, despite the uncertain outlook.
My reasoning is fairly simple. Although the coronavirus pandemic has had a severe impact on our lives and most major global economies, it will eventually pass. I’m buying stocks I expect to hold for many years. So it makes sense for me to buy them at a time when the market is pricing in bad news.
As always, there’s a Warren Buffett quote that describes this situation perfectly. Back in 1979, the legendary US investor reminded us that “the future is never clear; you pay a very high price in the stock market for a cheery consensus.”
The outlook for the wider economy isn’t great right now. Some companies are in trouble. But, as recent company results show, some businesses are doing quite well. In a recent article I looked at three UK shares which I think are much too cheap at the moment.
This is why I’m not worrying about the next stock market crash. By waiting for something that might not happen, I’d be missing out on opportunities today. For me, that just doesn’t add up.