Unfortunately, 2022 is shaping up to be the worst year for global investors since 2008, which marked the height of the global financial crisis of 2007-09. In 2008, the US S&P 500 index suffered a brutal stock market crash, collapsing 38.5% during that chaotic year (excluding cash dividends).
In the first quarter of this year, the S&P 500 lost 4.6% of its value. Not bad, considering Russia’s invasion of Ukraine began on 24 February. But then the index dived another 9% in April. That was its worst monthly performance since March 2020, when the stock market crashed due to Covid-19. Also, so far this May, the main US stock index had dropped another 3.2% by Tuesday’s close.
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Why be afraid of a stock market crash?
As a result of these sustained falls, the S&P 500 is down 16.1% this calendar year. This puts the index in correction territory. But a subsequent fall to a 20%+ decline would push the index into a bear market or full-on stock market crash.
For most of my 35 years as an investor, I’ve been terribly fearful of stock market crashes. Previously, that seemed to make perfect sense to me. After all, with most of my personal capital invested in equities, I had a lot to lose from falling share prices. However, my view has changed considerably in the past few years. Here’s why.
Falling prices mean better value
Sometimes, falling prices come as a welcome relief from speculative enthusiasm. In the three years from 2019 to 2021, the S&P 500 jumped by 28.9%, 16.3% and 26.9% respectively. After such outstanding returns, it was almost inevitable that some froth would be blown off prices this year. Indeed, in the second half of 2021, I repeatedly warned of the risks of a coming stock market crash.
At the start of this year, I felt that risk was being widely mispriced and that US stock prices in particular were overblown and overinflated. Hence, for me today, share prices dropping to more rational levels are a good thing. That’s because more realistic and sensible valuations suggest that future returns should be correspondingly higher.
What’s more, UK shares have been a welcome safe haven for investors during 2022. The FTSE 100 index has lost less than 0.7% so far this year. I believe this happened because the index was unloved and undervalued, both in historical and geographical terms. And that’s why I’m a big fan of cheap UK shares right now.
We’re building a cash pile for bargain buys
Though the S&P 500 has suffered its first five-week streak of weekly losses since June 2011, it stands just short of a stock market crash. Eventually, this losing streak will end and share prices will bounce back. In the long term, stocks look much better value today than they did when the S&P 500 hit its all-time high of 4,818.62 points on 3 January.
Thus, while watching falling markets, my wife and I continue to build up a ‘crash cash’ pile to invest in quality companies. Over time, our goal is invest 100% of this pot into attractively priced UK shares, notably lowly rated FTSE 100 stocks paying market-beating dividends. And, much as we did for the past decade, we’ll keep buying shares regularly while watching our cash dividends roll in!
This post was originally published on Motley Fool
