I’ve been following financial markets since the mid-80s and investing in shares since 1987. Over 33 years, I’ve witnessed every major and minor FTSE 100 crash since it was created in 1984. After every stock market crash, share prices recovered, got too high and the bubble burst again.
Another US stock market crash?
I think another stock market crash is inevitable. Indeed, its seeds may already have been sown. I think that share prices are far too high – but not necessarily on this side of the Atlantic.
It’s when I look at the US that I see some of the strongest cognitive dissonance I’ve seen in a third of a century of investing. As I write, the S&P 500 index hovers around 3,339 points. That’s just 47 points (1.4%) below its all-time closing high of 3,386 on 19 February.
Stock market crashes generally happen when prices reach elevated (and unrealistic) levels, as I believe is the case in New York today. How can the S&P 500 be so strong, when the US economy shrank by an annualised 32.9% in Q2? And when US unemployment was 10.2% in July, versus 3.5% in February?
When company valuations get detached from underlying economic reality, that’s when I most fear stock market crashes. Hence, I’m expecting another steep downturn in gravity-defying US stocks.
A UK stock market crash?
As for the probability of a UK stock market crash, I’m not so sure. Share prices here aren’t anywhere near as expensive as in the US. What’s more, the FTSE 100 index has a healthy dividend yield nearing 4% to help underpin current valuations.
The FTSE 100 is a long way away from previous market peaks. On Friday, it closed at 6,032 points. Here’s a list of four previous pre-stock market crash closing highs for the UK’s blue-chip index:
20th Century high: 6,930 (31/12/99)
Pre-GFC (global financial crisis) high: 6,732 (15/06/07)
All-time high: 7,877 (22/05/18)
2019/20 high: 7,675 (17/01/20)
Today, the FTSE 100 is way down on these major market highs. That’s one reason why I don’t see it as crazily overvalued.
Then again, when the American market sneezes, the UK market catches cold. If the S&P 500 does take a steep dive, I would expect the FTSE 100 to follow suit. Likewise, if Brexit goes badly, UK investors should hang on to their hats.
This share might survive the Apocalypse
As you might have grasped, I’m nervous about another market downturn. That’s why, for the past four months, I’ve focused on picking solid value shares from the FTSE 100. What I’m after is a wide margin of safety, so I don’t lose too much if my picks go awry.
Earlier this week, life insurer Legal & General Group (LSE: LGEN) released its latest results. I was mightily impressed with how this FTSE 100 firm had navigated this year’s stock market crash.
At Friday’s closing price of 227.2p, L&G shares are down 4.4% in the past 12 months. This values the group at £13.4bn, so it has size to add to its strengths. L&G shareholders must be asking, “Crash? What stock market crash?”, as the market meltdown has hardly hit their holdings at all. Then again, L&G shares did slump to 138p on 19 March, but have rebounded almost 65% since.
For me, L&G shares are a big buy, as they trade on a price-to-earnings ratio below 11 and offer a 7.8% dividend yield. I think it will take a lot more than a coronavirus-induced stock market crash to drag this share into the dirt!