After reaching the dizzying highs of 8,000 points in February, the FTSE 100 has moved lower over the past month, or so. At 7,500 points, it has been a swift correction, leading for some to sound the warning bells for a looming stock market crash.
Granted, I think it might be a while before we reach 8,000 points again. But here’s why I don’t think a crash is imminent.
Old information isn’t a new trigger
Let’s just quantify what we’re talking about. A market correction is when stocks fall by around 10% over the course of a few weeks/months. A crash usually sees a greater fall (maybe 20%) and over a shorter period of time. As was the case during the crash in 2020, it can be exceptionally swift.
When I look back at when the market crashed, one point stands out to me. Investors were caught off guard. Back in 2008/2009, revelations about the banking sector triggered panic, with stocks falling. In 2020, it was the outbreak of Covid-19 and the surprise with which it spread around the world.
Right now, some are saying that rising interest rates and continued inflation is going to cause a crash. Yet I struggle to see this being viable. Simply put, this is not a surprise to investors. It’s not something that’s new information to digest. We’ve all been well aware of the impact of interest rates and the pressure it has already put on the global economy.
Of course, if we get some new triggers for concern (perhaps Russia attacking a NATO country, or China invading Taiwan) then I’d need to rethink my view. But as we currently stand, I just don’t see how we’ll be spooked by knowledge that’s already public.
The market isn’t overvalued
Another reason I’ve heard that could cause a market crash is the FTSE 100 is too high. At 8,000 points, it was celebrated as an all-time high. To some extent, I was a little puzzled by the rally to this level, given the situation the UK is currently in.
The FTSE 100 has shed 500 points since then, which is a healthy correction from overeager buying. At the same time, I struggle to see a crash from here as the market isn’t expensive.
A metric I look at is the price-to-earnings (P/E) ratio. I can use this at a company level, but also look at the average for the entire FTSE 100. At the moment, the P/E ratio is 10.6. This compares to the five-year average of 15.2 and the average from the past decade of 16.3. So does the current level reflect stocks that are overinflated in value? I don’t think so at all.
Being flexible
The world does change quickly, and if we do get new information that causes a crash, I’ll need to make adjustments. For my portfolio, I’d look to invest in defensive stocks such as utility companies and supermarkets.
Until that happens, I’m happy to stick to investing small amounts on a regular basis. Historically, the trend for the market in the long run is higher.
This post was originally published on Motley Fool
