This century is still young, but it’s already brought three stock market crashes. Isn’t that scary?
It was the dot com bubble first, which burst and sent shares crashing. We were hardly back on our feet, when the big bank crunch sent shares down again. Then after a calm 10 years or so, the Covid virus hit.
Now there’s talk of a new crash, and the banks are in the firing line again. But will it happen?
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The last bank crash was led by the US. This time, it’s also the US leading the way.
S&P 500 down
The S&P 500 perked up a bit in the past week. But it’s still down 17% from its early 2022 high, in a bit over a year.
I don’t think that on its own is anything to panic about. But comparison with the FTSE 100 since the year 2000 is interesting. And maybe worrying.
The UK and US indexes stayed neck and neck until 2012. And then US stocks just took off.
Since the turn of the century, FTSE 100 shares have managed a weedy 8% gain. There’s a couple of decades of dividends of 3%-4% on top, so the return is not as bad as it seems.
But in the same time, the US index has soared by 170%. US stocks tend to make bigger profits than many here in the UK. But to me, that looks like maybe a bit too much heat.
Bank valuation
Many pundits predict an S&P crash this year. And I think I can see why. But I don’t think it’s the banks that are over-valued. Let’s look at a few examples.
Here in the UK, Lloyds Banking Group is on a forward price-to-earnings (P/E) ratio of around 6.5. That’s less than half the FTSE 100 long-term average.
For NatWest, we’re looking at a ratio of just six, and the Barclays P/E is under five. Those aren’t priced just for a crash, they’re surely priced to go bust.
But the picture is not wildly different for US banks. JPMorgan Chase, the nation’s biggest, is on a P/E of 10.
Bank of America shows a ratio of about 8.5, and at Wells Fargo we’re looking at slightly under eight.
No crash?
Those are higher valuations than the UK banks. But they’re not that high. And they don’t scream ‘crash ahead’ to me.
Never mind bank valuations falling if we have a new bank crisis. They’re still way down from the last one.
The S&P 500 is now on a P/E of around 18, which is a bit above the FTSE 100’s 14 or so.
So the values of US bank stocks are a fair bit lower than the index, just like in the UK.
Crash still possible
None of this means there won’t be a new bank crisis. Or there won’t be a stock market crash.
Emotion and sentiment, after all, are often not that rational.
But I don’t think any crash would be justified by the numbers.
So what will I do? I want to buy more cheap bank shares.
