Brexit bear market: how low could the FTSE 100 go?

union jack flag and iconic Big Ben at the palace of Westminster, London
union jack flag and iconic Big Ben at the palace of Westminster, London

These are nervous times for investors and no doubt many will be wondering if their money would be safer in cash. I wrote back in November that the Brexit turmoil was likely to cause an extended period of instability. At the time I recommended watching it play out and keeping an eye out for bargains, and sure enough things have continued to look bleak and the stock market has thrown up many discounts. But is there worse to come?

A spectre looming

The current bear market seems predominantly concerned with the execution of Brexit. There are other international factors at play but there is more going on than can be discussed in this article.

As the situation has become more protracted the FTSE 100 has fallen to discount in the increasing chance of a no-deal. If we crash out without a deal, there would undoubtedly be some disruption that would cause investors to panic and sell. However from reading companies’ projections, most are confident that while trading may be affected in the short term, the long-term outlook is still positive overall.

I believe that we will agree a deal before the Brexit deadline (after all both sides want a deal in place), but when it comes to share investing, it’s best to take clues from the market ahead of your own judgement. At the moment there are few signs that things will be turning around imminently.

Is now the time to buy?

One of my favourite descriptions of the stock market is by Warren Buffett who refers to it as “Mr Market”. He says it has “incurable emotional problems” and swings wildly between euphoria and depression. The more depressed Mr Market is, the better the buying opportunities there are available.

The reason this personality exists is because of the dynamics of supply and demand. When there is a lot of bad news about and prices are falling, people become emotional and want to sell. Few want to buy an asset with a price that is falling but lots want to sell, so the price comes under enormous pressure. Even if there are not a lot of sellers, a lack of buyers can cause a stock price to plummet on low volume.

Are stocks cheap?

There have been suggestions for the last few years that the stock market has been headed for a correction, which entails a pullback in share prices, but not on the scale of a crash. Yet while prices may have become expensive in the US I think the UK has mostly remained fairly priced.

The forward looking price-to-earnings ratio (P/E) for the FTSE 100 is currently below 12, the last time it was this low was back in 2013. This is a better indicator of the value of the FTSE 100 than looking at the price as the P/E takes into account the earnings of companies. And while value investors may be buying at these levels but growth and momentum investors are probably staying cautious.

So what do I think this all means? Well, I feel that stocks are cheap, but I wouldn’t rush to buy as I also think they could get cheaper. I won’t predict just how low the Footsie could go but the factors causing the market to slip are unresolved and I don’t expect to see a reversal until the story changes.

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