Is the FTSE about to crash?

After hitting a record high on 16 February, the FTSE 100 index has declined over the past fortnight. Are UK shares heading for a crash, or should I relax?

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The UK stock market has been a star performer since global markets peaked in early 2022. But after being a safe port in a storm last year, are the FTSE 100 and FTSE 250 indexes heading for a crash in 2023?

Stock markets crash

After 2020’s pandemic panic sent global stock markets plunging, prices rebounded strongly after ‘Vaccine Monday’ (9 November 2020). Indeed, US stocks hit new highs during this huge relief rally, as seen below:

IndexAll-time highDate
S&P 5004,818.624 January 2022
Nasdaq Composite16,212.2322 November 2021

After peaking, both indexes plunged steeply. At its 2022 low, the S&P 500 crashed to 3,491.58 on 13 October. That left it down more than a quarter (-27.5%) from its all-time high.

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Meanwhile, the tech-heavy Nasdaq Composite index collapsed even harder, also falling to its 2022 low of 10,088.83 on 13 October. That left it down almost two-fifths (-37.8%) from its November 2021 peak.

A great year for value investors

In 2022, global stocks lost around $25trn (£20.8trn) in value. Also, collapsing bond prices wiped almost $10trn (£8.3trn) from bond markets. Yet my family portfolio sailed through this storm, registering only a low single-digit loss in the worst year for stocks and bonds combined since 1929.

How did my wife and I do this? From autumn 2021, I was certain that financial assets were in an ‘everything bubble’ and heading for a fall. Hence, we stopped buying expensive US stocks and began building a cash war-chest to buy fallen shares.

As markets melted down in 2022, we bought a wide range of FTSE 100, FTSE 250, and US shares that looked inexpensive or offered attractive dividend yields. In short, we added balance and ballast to our portfolio by buying ‘boring’ value stocks.

This strategy — dumping expensive US stocks, hoarding cash, and then buying cheap UK shares — has paid off so far. For our portfolio, it’s like the 2022 crash never happened.

Will the FTSE crash in 2023?

Having reduced our exposure to US stock markets and increased our investment in UK shares, should we be worried? What if, say, the FTSE 100 and FTSE 250 both crash in 2023?

The FTSE 100 hit a record high of 8,047.06 on 16 February, just over two weeks ago. Meanwhile, the FTSE 250 peaked at 24,353.85 on 7 September 2021.

As I write, the FTSE 100 stands at 7,944.32, down just 1.3% from its peak. Meanwhile, the FTSE 250 is at 19,906.94, down almost a fifth (-18.3%) from its 2021 record high. In one sense, the FTSE 250 has already crashed.

But when I view the FTSE 100 in particular, I see no obvious reason to fear a coming stock-market crash. The Footsie trades on a price-to-earnings ratio of 11.9, for an earnings yield of 8.4%. That’s looks cheap to me.

In addition, the blue-chip index offers a dividend yield of 3.5% a year. That’s roughly in line with interest rates offered by top savings accounts. However, the FTSE 100’s cash yield is covered almost 2.4 times by earnings, which is a solid margin of safety.

Summing up, despite the growing risks of a UK recession (and house prices falling), I don’t expect the UK stock market to crash this year. Indeed, it still looks too cheap to me today!

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Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services, such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.

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