As I write these words, the FTSE 100 index is down around 15% from its recent peak of 7,103 at the end of April. It closed around 5,900 yesterday, though rebounded this morning to just over 6,000.
A fairly remarkable reversal in a few short months.
Or, put another way, were midway between a correction, defined as a 10% drop, and a bear market, defined as a 20% drop.
That said, while the FTSE 100 is down 9% since the start of the year, the FTSE 250 Londons mid-cap index is still in profit, just. Which goes to underscore the extent to which Londons main market is dominated by oil companies, miners and financial stocks.
(Which, by the way, is one reason why I always recommend novice investors to buy FTSE All-Share index trackers, not FTSE 100 index trackers. Or, if theyre feeling bullish, FTSE 250 index trackers.)
Where next?
So where is the market heading? The truthful answer is that no one knows, although that wont prevent the usual pundits clogging the airwaves with guesses and predictions.
And Im not going to pretend that Im any better informed. Up? Down? Sideways? Ive absolutely no idea.
But as an investor with a focus on income, I do know that whatever happens, right now there are opportunities to be had.
Sure, markets could fall further but even so, an awful lot of decent stocks currently have an On Sale! flag hoisted over them.
Pain drives down prices
And its not difficult to spot them. As Ive mentioned before, oil companies and miners and the businesses that supply these sectors are going through a rough patch as the price of these commodities slumps, propelled by falling demand from China.
In the past six months, for instance, the share price of BHP Billiton has fallen by 40% and it is reckoned to be one of the stronger mining companies, and among those least likely to take the axe to their dividends.
Royal Dutch Shell, which hasnt cut its dividend since the Second World War, has seen its share price drop by 28% in the last six months. Its now offering a forecast yield of 7.1%, on a prospective P/E of 13.
Asia is another pain point, with banks which are exposed to Asias economies being hit hard. Standard Chartereds shares are down 24% over the past six months, for example. That said, the business is going through a torrid patch right now, on a number of fronts.
How about HSBC? Europes biggest bank? It too has been hit hard. Back when the FTSE 100 was at 7,103, HSBCs shares were changing hands for 650p. Today, as I write these words, you can pick them up at 487p a decline of some 25%. Offering a 6% yield, you cant blame investors for feeling tempted.
Widespread bargains
But frankly, in todays market, the pain is being felt almost everywhere. Defence and aerospace giant BAE Systems, for instance, is down 20% over the last six months, yielding 4.8% on a P/E of 12.
Among utilities, Ive been mulling a taking a small stake in National Grid, down 10% over the past six months, and yielding 5.2% on a P/E of 15.
Heck, even companies such as Diageo and Unilever which almost always seem expensive are starting to look attractive.
Sitting on the fence
That said, its a safe bet that many private investors will do absolutely nothing by way of taking advantage of these low prices.
Thats because, time and again, they exhibit a kind of behavioural paralysis in situations like these pushing the buy button only when everythings rosy, and sitting on their hands when its not.
Suppose the market goes lower still, they worry. Wont I have made a loss? Maybe its better to wait until the worst is over?
But by then, of course, the bargain prices are history. The boat has sailed, and the opportunity gone.
Hamburger homilies
Warren Buffett, as usual, sums it up well.
If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices?
As he points out, these questions answer themselves. But now ask the question again, but in the context of stock markets and share prices:
If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period?
Yet now that we have that lower stock market, it feels uncomfortable. Because, instinctively, many investors perversely want higher prices, not lower prices so that they can feel good about what theyve bought.
Theyre mistaken.Its better by far to lock in decent prices today, rather than hope for or alternatively, worry about better prices tomorrow.
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Malcolm Wheatley owns shares in BHP Billiton, Royal Dutch Shell, HSBC, BAE Systems, and Unilever. The Motley Fool UK has recommended HSBC shares, and owns Unilever shares.
