Fears of a stock market bubble that is set to burst are likely to have risen over recent months. The FTSE 100 has gained 35% since reaching its lowest point during the February/March 2020 bear market.
However, it continues to trade around 13% down on the all-time high recorded in 2018. The short-term outlook for the world economy is challenging, of course. But there may be buying opportunities available for long-term investors at the present time.
Stock market bubbles: part of FTSE 100 history
The past performance of the FTSE 100 shows that stock market bubbles and subsequent crashes are part of its fabric. In other words, it has always experienced bull markets that are followed by bear markets, and vice versa. As such, the current bull market is very unlikely to last in perpetuity. This means that a bear market is almost inevitably set to take place at some point in future.
Of course, predicting when that will happen is extremely challenging. Any number of risks could prompt a weakening of investor sentiment, as well as falling revenues and profitability for large-cap shares. At the moment, the outlook for the world economy is very uncertain. Coronavirus continues to negatively impact the performances of many businesses. And this could lead the FTSE 100 lower and cause the stock market bubble to burst. However, other factors such as low valuations within the index and a favourable monetary policy environment may yet push the stock market to record highs.
Taking a long-term view of UK shares
There are always difficulties in predicting when a stock market bubble will burst. So taking a long-term view of the FTSE 100 could be a sound move. This means ignoring potential short-term challenges that may cause high volatility over a period of months. Instead focusing on the valuations of companies based on their financial prospects over the coming years, is a better approach.
Using this strategy, many large-cap shares appear to be cheap at the present time. As mentioned, the index itself is trading significantly below its record high, while a number of sectors — such as banking, travel and leisure and oil and gas — contain numerous companies with valuations that are substantially below their long-term averages.
Certainly, buying FTSE 100 shares now may lead to paper losses in the near term should the stock market bubble burst. However, it appears as though the index’s price level may account for many of the risks faced by the world economy at the present time. Therefore, on a long-term view, large-cap shares could provide buying opportunities right now. Over time, the past performance of the index suggests that looking beyond short-term risks to focus on where shares will be priced in the coming years is a sound means of capitalising on market cycles.