Last week was an unhappy one for owners of UK shares, especially banking stocks. In five trading sessions, the FTSE 100 dropped over 5.3%. However, US stocks fared much better, with the S&P 500 up 2.1%. Once again, this shows the power of portfolio diversification — spreading one’s money widely.
The Footsie is far from a bear market
At its 16 February all-time high, the FTSE 100 was up 8% for 2023. As I write, it has since dived 8.8% from this peak. This leaves it down 1.6% in 2023 so far.
Though I’m hearing many people worrying about another stock-market crash, the Footsie is a long way from a bear market. This happens when an index falls by a fifth or more from a previous peak.
Thus, for the UK’s main index to enter a bear market, the FTSE 100 would have to fall below 6,437.6 points. That’s roughly 900 points to go.
This week could be another roller-coaster ride
For the record, I don’t expect the FTSE 100 to drop below 6,500 points any time soon. It could do so, but would be incredibly cheap at those levels. In fact, it might even be the most undervalued major stock market index in the world.
That said, I expect continued volatility and price falls this week in the London market. Indeed, pre-market indicators suggest that the FTSE 100 will open down 18 points (-0.25%) on Monday.
This market instability was triggered by the collapse of two mid-sized, tech-focused US banks over a week ago. Fears of ‘bank contagion’ then rapidly spread across global markets.
The latest domino to wobble in this liquidity crisis is Credit Suisse, Switzerland’s second-largest bank. Having been badly run for much of the past 15 years, ‘Debit Suisse’ has lurched from one crisis to another.
Now in a weakened state after a run on its deposit base, larger Swiss rival UBS has offered to take over the bank for 50 Swiss cents (45p) per share. This values it at over $2bn, but that’s more than 73% below Friday’s closing value, when the share price was CHF1.86 (£1.65).
The FTSE 100 might get worse before it gets better
As I recall all too well from covering the global financial crisis of 2007-09, bank runs can do huge harm to financial markets. Also, it’s simply not possible to predict when this storm will be over until it’s well into the rear-view mirror. At present, Mr Market’s mood seems rather panicky to me.
Even so, I see the FTSE 100 as remarkably cheap today. I’d gladly pour even more money into Footsie stocks at deeper discounts. Alas, my wife and I are already fully invested in shares. So we’ll just have to sit back and keep collecting our cash dividends, while waiting for this latest storm to subside.
But when the next tax year starts on 6 April, we’ll rush to buy quality shares — including bank stocks — at knock-down prices. This strategy has served us well for 35 years and more!
