Is the FTSE about to crash?

The UK stock market has been a star performer since global markets peaked in early 2022. But after being a safe haven during last year’s storm, FTSE 100 and FTSE 250 index headed for a crash in 2023?

The stock market collapsed

After the 2020 pandemic panic sent global stock markets crashing, prices rose again after ‘Vaccine Monday’ (November 9, 2020). Indeed, US stocks hit new highs during this massive relief rally, as seen below:

After the peak, both indices collapsed. In 2022 the lowest, the S&P 500 fell to 3,491.58 on October 13. That resulted in a drop of more than a quarter (-27.5%) from its all-time high.

Meanwhile, in tech-heavy Nasdaq Composite the index fell even harder, also fell in 2022 less than 10,088.83 on October 13. That’s down almost two-fifths (-37.8%) from the November 2021 peak.

A good year for value investors

By 2022, global stocks will lose around $25trn (£20.8trn). Also, falling bond prices removed almost $10trn (£8.3trn) from the bond market. But the family portfolio weathered the storm, registering only single-digit losses in the worst year for stocks and bonds combined since 1929.

How do my husband and I do this? From the fall of 2021, I believe that financial assets are in a ‘total bubble’ and will collapse. Therefore, we stopped buying expensive US stocks and started building a cash war chest to buy falling stocks.

As the market falls in 2022, we buy a range of FTSE 100, FTSE 250 and US stocks that look cheap or offer attractive dividends. In short, we add balance and ballast to our portfolio by buying ‘boring’ value stocks.

This strategy – dumping expensive US stocks, stealing cash, and then buying cheap UK stocks – has paid off so far. For our portfolio, it’s like the 2022 crash never happened.

Will the FTSE crash in 2023?

After reducing our exposure to the US stock market and increasing our investment in UK stocks, should we be worried? What if, say, the FTSE 100 and FTSE 250 both crash in 2023?

The FTSE 100 hit a record high of 8,047.06 on February 16, just two weeks ago. Meanwhile, the FTSE 250 peaked at 24,353.85 on 7 September 2021.

As I write, the FTSE 100 is at 7,944.32, down just 1.3% from its peak. Meanwhile, the FTSE 250 is at 19,906.94, down almost five times (-18.3%) from the record high of 2021. In one sense, the FTSE 250 has crashed.

But looking at the FTSE 100 specifically, I see no clear reason to fear a stock market crash. The Footsie trades at a price-to-earnings ratio of 11.9, for a yield of 8.4%. It seems cheap to me.

In addition, the blue-chip index provides a dividend yield of 3.5% annually. That is roughly in line with the interest rates offered by the top savings accounts. However, the FTSE 100 cash yield is covered by almost 2.4 times earnings, which is a solid margin of safety.

In summary, despite the risk of a UK recession (and falling house prices), I do not expect the UK stock market to collapse this year. Indeed, it still seems very cheap to me!