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Having followed financial markets since the 1980s, I’ve witnessed four stock market crashes. My first was Black Monday — 19 October 1987 — when the Dow Jones Industrial Average shed 508 points (22.6%) overnight. Ouch.
Market meltdowns
My second major meltdown was the ‘dotcom bubble’ bursting in 2000-03. From end-1999 to 12 March 2003, the FTSE All-Share Index plummeted by 50.9%.
My third financial collapse? The global financial crisis of 2007-09. From 25 June 2007 to 3 March 2009, the FTSE All-Share Index crashed by 48.6%. Fortunately, I warned many times of this coming chaos, vastly reducing my losses during this bear market.
My fourth stock-market crash was the Covid-19 ‘flash crash’ of spring 2020. The FTSE All-Share Index slumped 37.2% from 17 January to 19 March. Having put 50% of my family fortune into cash at end-2019, I gobbled up great stocks at bargain prices during this rout.
Bubble and squeak
Discussing US stock valuations recently, a friend offered a misquoted comment from former Manchester United manager Sir Alex Ferguson. Arguing that American equities were priced for perfection, he warned this could be ‘squeaky bum time’ for global investors.
Reviewing the S&P 500, I agree. The leading US stock-market index trades on an elevated price-to-earnings ratio of 23.9 times historic earnings, well ahead of its long-term average. Also, its dividend yield of 1.3% a year is modest, reflecting American companies’ reluctance to return cash to shareholders.
In contrast, the UK’s FTSE 100 index seems cheap as chips to me. It trades on 14.7 times trailing earnings and offers a dividend yield of 3.6% a year — a useful cash stream for value and income investors, including me.
Bang or hiss?
Lacking a crystal ball, I have no idea whether the US stock market bubble — if it truly is a bubble — will burst or gently deflate. Indeed, I expect the S&P 500 to hit higher highs before financial gravity’s pull. Also, future declines might last a week, a month, a quarter, or a year. Who knows? What I do know is that buying quality stocks during bearish periods usually pays off handsomely over time.
Silicon value
Right now, the S&P 500’s valuation is inflated by the highly rated stocks of the Magnificent Seven mega-cap tech firms. In particular, Elon Musk’s carmaker Tesla and Jensen Huang’s chipmaker Nvidia trade on sky-high earnings multiples.
However, one ‘Mag 7’ member seems an outstanding value stock to me. It is Alphabet (NASDAQ: GOOG), owner of all-powerful search engine Google. After recent share price falls, Alphabet has dropped to fifth in the league table of US-listed Goliaths.
At its 52-week peak, the Alphabet share price hit an all-time high of $208.70 on 4 February. As I write, it stands at $171.75, down 17.7% in four weeks. This values this tech Titan at $2.1trn — a valuation driven down partly by a federal anti-trust investigation into its dominance in online advertising.
For me, this fall pushes this well-known stock well into ‘Silicon value’, trading on 21 times earnings with a dividend yield nearing 0.5% a year as a bonus. I’d buy big into Alphabet today, had we not bought this stock at its five-year low in November 2022. Of course, anti-trust issues and slower earnings growth could batter this stock, but we will keep tight hold of our high-performing Alphabet shares!
