Whatever you may have read, the stock market didn’t crash last week. There’s a strict definition of a crash, and the FTSE 100 didn’t meet it.
It didn’t even qualify as a correction, which means a 10% drop over a short period. A crash requires a fall of 20% or more. In the last five trading days, the UK’s blue-chip index slipped 5.74%, largely caused by the war in Iran. So we’re nowhere near a crash yet.
That doesn’t mean we won’t get there. Given the uncertainty, markets could have a lot further to fall. So what should investors do?
At The Motley Fool we have a tried and tested approach to moments like this. Don’t panic. Don’t try to second-guess the market. And above all, don’t sell. That only turns a paper loss into a real one.
Instead, sit tight and keep calm. If there’s spare cash available, consider using it to buy strong companies whose share prices have temporarily fallen. That takes courage, of course. It’s not easy to keep a cool head when the headlines are screaming about war. But history shows that even outright crashes don’t last forever.
At some point the panic subsides, bargain hunters move in, and shares resume their long-term upward trend. Short-term market volatility is the price investors pay for the superior long-term returns from equities.
There are exceptions. If someone needs their money soon, say for a house deposit, it probably shouldn’t be in shares in the first place. Ideally, investors should only commit money they won’t need for at least five years, and preferably much longer. With that in mind, opportunities are already emerging.
While the FTSE 100 itself has only dipped modestly, many individual stocks have fallen much further. British Airways owner International Consolidated Airlines Group, housebuilders Persimmon (LSE: PSN) and Barratt Redrow, consumer goods giant Reckitt and engineer Weir Group all dropped around 14% last week. Precious metals miner Fresnillo fell 17%, finally breaking its strong run. They’re firmly into correction territory.
Many of them issued news or results last week, so the Iran war isn’t exclusively to blame. Persimmon didn’t though. Housebuilders often struggle in uncertain times. Consumer confidence falls and people become reluctant to make big purchases like homes.
This time, there’s interest rate risk. If rising oil prices push inflation higher, the Bank of England may delay cutting rates, or even increase them. Higher mortgage costs would squeeze housing demand.
However, Persimmon now looks reasonably valued, trading on a price-to-earnings ratio of about 14.3. The dip has also pushed the trailing dividend yield up to 4.6%. There are risks, of course. Housebuilders have struggled since Brexit in 2016. Persimmon shares are up 12% over the past year, but down a painful 55% over five.
