After staging a recovery from mid-June onwards, global stock markets have resumed the falls they began in the first half of the year. At its 2022 low, the US S&P 500 index had lost almost a quarter (-24.5%) of its value from its all-time high on 4 January. This qualified as a full-on bear market, also known as a stock market crash.
US stocks then rebounded, with the S&P 500 closing at 4,305.20 points on 16 August, just 10.7% below January’s peak. But the index has since resumed its descent, losing 8.9% since 16 August to leave it 18.6% below its record high.
London has dodged this crash
One old City of London saying goes: “When New York sneezes, London catches a cold.” In other words, when US stocks slump, UK shares usually follow suit. However, on this side of the Atlantic, shares have comfortably avoided a full-blown stock market crash.
At its 52-week high, the FTSE 100 index hit 7,687.27 points on 10 February. After Russia invaded Ukraine on 24 February, the Footsie slumped to 6,787.98 on 7 March, down 11.7%. But this proved to be the blue-chip index’s 2022 low. As I write, it stands at 7,227.83, just 6.5% below its 52-week high. Phew.
In the second half of 2021, I repeatedly warned that US stocks were very overpriced and heading for a fall. This prediction came true, as the US stocks crashed, prices plunged, dealing spreads widened and trading liquidity fell. However, at the same time, I argued that UK value shares were cheap, notably in the FTSE 100 index.
For the record, the US stock market crash in the first six months of this year was the worst first-half performance since 1970. That’s 52 years ago, when I was just two years old. Wow.
I’ve been busily buying cheap UK shares
Despite my fears about overvalued American stocks, I’ve been buying lots of cheap British shares lately. Indeed, my wife and I have built a new standalone portfolio of 10 shares, all chosen for their market-beating dividend yields. After a very positive start, this portfolio’s performance has reversed and it has since lost 2.3% of its value to date.
Meanwhile, a whole host of investment pundits have been lining up to warn that this latest stock market crash is far from over. For example, veteran ex-GMO fund manager Jeremy Grantham — a so-called ‘perma-bear’ for much of the past decade — argues that the current ‘super-bubble’ has yet to burst fully, with the worst yet to come.
Likewise, Dr Michael Burry — the investor immortalised by the excellent Big Short film — also expects further downturns in this stock market slump. Like Grantham, Burry expects prices of overpriced assets (including stocks, bonds and property) to crash lower. Both cite inflated valuations, rising interest rates, soaring inflation, supply-chain problems, and the risk of a nasty recession as the reasons behind their calls. And both expect the US market to bottom out only after falling 50% or more. Yikes.
In summary, though I also expect US stock prices to fall further, experience has shown me that stock market meltdowns provide great opportunities to buy at bargain prices. And that’s why I’ll keep buying cheap shares in 2022 to generate decent returns and build future wealth!