The FTSE 100 has fallen by more than 25% so far this year. But since last Monday, the index is up by about 10%. If you’re invested in shares, you’re probably breathing a sigh of relief. But is the stock market crash really over?
In this article, I’ll explain where I think the FTSE 100 is likely to go next. I’ll also look at why I believe that the market is currently offering us some of the best buying opportunities since the financial crisis.
Where next for the FTSE 100?
Earthquakes are often followed by aftershocks, which can be severe. In my experience, it’s often the same with stock market crashes.
In the 2008/09 crash, for example, the FTSE 100 made two new lows under 4,500 before plunging to its final low point of 3,512. The good news is that within six months, the FTSE was back above 5,000 — a rise of more than 40% from its lowest point.
Market crashes don’t follow a fixed pattern. But I think that last week’s 4,993 low was probably the bottom for the FTSE 100. Despite this, I expect to see a lot more volatility over the next few weeks. I also think there’s a good chance the index could drop back towards 5,000 again before staging another rally.
How I’d handle the volatility
Many big FTSE 100 stocks are currently moving up and down by as much as 10% each day. Such big moves are unusual for larger companies, whose share prices are usually quite stable.
You may be tempted to try and trade these wild swings, but I wouldn’t recommend it. It’s incredibly difficult to catch such moves, most of which take place when the market opens. The only certainty is that you’ll spend a lot of money on dealing fees.
What I’m doing with the FTSE 100
Economies around the world are currently battened down in an effort to slow the coronavirus pandemic. No one quite knows what’s happening and everyone is worried. Companies are cutting dividends and desperately hoarding cash.
That’s the story today and probably for the next few weeks or months. But when we look beyond this, I think investors will start to realise that the world will recover from the coronavirus pandemic.
The latest news from China shows that factories are open again and movement restrictions are being lifted. At some point, the same will happen in the west. Companies will be able to trade normally again, and will issue new profit guidance for 2020 and 2021.
I’m buying FTSE 100 stocks ahead of a future recovery. I don’t know when things will return to normal, but I’m sure that they will.
Buy today or wait?
It’s tempting to wait until the picture becomes clearer before you start to buy. The problem with this approach is that the market always looks forward. As soon as good news is on the horizon, I expect share prices to rise.
History suggests that big wins in the stock market come from following Warren Buffett’s advice to be “greedy when others are fearful”.
As I write, the FTSE 100 is trading on about 12 times earnings. I’d be very surprised if investors who buy at this level don’t make money over the next few years.
