The FTSE 100 index had a decent run last week – until Friday. Between Monday and Thursday, the index rose every single day. The rise was nothing to write home about; in fact it was as muted, averaging at about 0.3% every day. But on Friday, the investor mood changed completely as fears of coronavirus grew. Suddenly, an uneventful week turned dramatic and by the end of the day, the FTSE 100 index was down by a pretty big 3.6%. This is the biggest single day fall seen since the start of April 2020, which is almost 20 months ago!
In other words, the fall is only comparable to the conditions we last saw when the pandemic first began. And to me, it also indicates that if we were to go into a lockdown again tomorrow, we should really brace for a real stock market crash, which would happen if the index falls 10% or more in a single day.
Higher FTSE 100 dividend yields
A stock market crash, in my opinion, is the biggest opportunity to buy FTSE 100 stocks at lower prices than we would see them at otherwise — and that can set us up for huge gains over the next years. Consider utilities, for instance. Their dividends were largely sustained during the pandemic, which is important for me. Continuity of dividends gives predictability to my income even during otherwise difficult times.
And a lot of them have dividend yields at 4%+ levels, which I think is decent. But here is the best part. If I buy them when their price inevitably dips during a market crash, I could end up with a much higher dividend yield on my investments. And as the situation stabilises again and they are in a position to offer better dividends, the yield I receive only gets bigger.
Good time to buy strong defensives
I would also buy strong defensive stocks that could hold me in good stead even if the economy remains in a bit of a mess for sometime. Examples of these would include healthcare and pharmaceuticals stocks as well as other Covid-19 related stocks like hygiene services providers and manufacturers of protective personal equipment. Among such FTSE 100 stocks, I find that their appeal goes much beyond the relevance they hold during a pandemic. So, even in more normal times, they can continue to generate capital gains for me.
What to avoid
However, I would be careful not to make too many risky investments. Travel stocks, for instance, are already in doldrums. And their financial position has been so badly affected because of Covid-19 that they could be even more impacted by another round of restrictions. I bought some aviation stocks in the past few months, which are in the red now. And I doubt if their stock prices would rise in a hurry.
Besides such high-risk stocks, however, a stock market crash could be just the opportunity to make good investments for the long term, in my view.