The UK’s blue-chip FTSE 100 index is undergoing something of a slump. The index has taken a dive since mid-September, leaving it trailing other major market indexes. Why is Mr Market so negative on UK shares? Is the London market heading for a full-on stock-market crash?
The FTSE 100 limps along
As I write (mid-Wednesday, 26 October), the Footsie hovers around 7,379.36 points, having fallen again this morning. Here’s how the index has performed over six time periods:
| Five days | -1.6% |
| One month | -3.2% |
| Six months | -6.0% |
| 2023 to date | -1.0% |
| One year | +4.6% |
| Five years | +6.3% |
The FTSE 100’s weakness over the past six weeks means it has lost 6% of its value in the last six months. What’s more, it’s now recording a negative return for 2023, despite a strong start to this year.
Passive income stocks: our picks
Do you like the idea of dividend income?
The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?
If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…
Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.
What’s more, today we’re giving away one of these stock picks, absolutely free!
Also, since hitting a historic high of 8,047.06 points on 16 February, the FTSE 100 has dived 8.3%. In other words, the index has had a weak year. At least it is up modestly over one and five years.
Sentiment is trumping fundamentals
When a younger investor, I would cheer rising markets and boo falling share prices. I’ve since realised that falling markets can present excellent buying opportunities for long-term investors.
However, poor sentiment and a negative narrative keep contributing to UK market weakness. Indeed, I’ve read dozens of articles this years claiming that the London market is ‘washed up’, a ‘dead zone’ and a ‘graveyard for equities’.
Thus, the FTSE 100 has rarely been so undervalued in my lifetime, both historically and geographically. Today, it trades on a modest multiple of 10.9 times earnings, for a healthy earnings yield of 9.1%.
Crucially, the above returns I’ve quote exclude dividends — regular cash payouts made by many companies to their owners. The Footsie offers a dividend yield of 4% a year, among the highest of major indexes. In addition, this cash yield is covered a comfortable 2.3 times by earnings.
Then again, while the FTSE 100 looks dirt cheap, it just keeps on getting cheaper. So maybe I’m wrong and it’s heading for further falls?
Will it crash?
In investing terms, a fall of 10% from a previous high is known as a correction. The FTSE 100 is closing on that level right now. But a full-blown stock-market crash requires a slump of 20% or more from a former peak.
For the FTSE 100 to hit crash levels, it would need to drop below 6,437.65 points. For the record, that’s a loss of another 941.71 points from here — let’s call it a round 1,000.
Do I expect the index to lose another 1,000 points in 2023? Not at all. However, it could conceivably drop a thousand points between now and end-2024. But that would leave it way below its 52-week low of 6,949.24, hit around a year ago.
Lastly, if the FTSE 100 were to fall below 6,500 points, then I’d be a big buyer of London stocks. Hence, my wife and I have set aside a cash ‘war chest’ to buy if/when UK shares next crash. After all, this strategy worked out very nicely for us in the 2007/09 and 2020 stock-market meltdowns!
