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The FTSE 100 has enjoyed a stellar year, so far. Up 10.7% since 1 January, it’s outperformed multiple other major blue-chip share indices including the S&P 500 (up 7.3%), Nasdaq (up 8.5%) and the Nikkei (up 3.2%).
In that time, it’s touched record highs, approaching 9,200 points over the past week. And it looks poised to hit new all-time peaks given strong demand for undervalued UK shares.
Or does it?
Data from IG suggests that investor sentiment may actually be turning against the Footsie — it shows shorting activity involving the index rose 34% last month. Shorting involves traders borrowing an asset and selling it, on the hope of buying it back more cheaply later on.
But what are the chances of a full-blown correction? And what steps should I, as holder of FTSE 100 stocks, protect myself from such an event?
Red lights flashing?
On the one hand, the recent shorting boom will partly reflect investors looking to capitalise on a fall as individuals book profits. Short-term pullbacks are common during strong bull runs for this reason; they don’t necessarily mark a broader reversal in market confidence.
However, the red lights are flashing as trade tariffs bite and the global economy cools. Chief investment officer Mike Wilson of Morgan Stanley puts the chances of an S&P 500 correction at 10% by the end of the year, he told Bloomberg. Other brokerages and banks put the chances of a retracement still higher.
On the one hand, this may reflect the sky-high valuations many US shares still command. Yet with a large contingent of cyclical shares (like banks, miners, airlines and energy producers), the FTSE may also decline if economic conditions worsen and sentiment sours.
Correction? So what?
Yet I’m not panicking about what may be around the corner. This is because stock markets have a habit of rebounding sharply from corrections. The Footsie is a prime example, recovering from multiple catastrophes like pandemics, banking sector meltdowns, wars and sovereign debt crises down the years, and culminating in July’s record highs.
This shows how patient investors are rewarded for not selling up and running for the hills. In fact, those that buy in when shares fall can enjoy supersized returns when the market recovers. It’s a strategy that made me money when global stock markets fell sharply earlier this year. So I’m holding cash to jump in again and go bargain-shopping if they drop again.
Ashtead Group‘s (LSE:AHT) one FTSE 100 share I’ll be looking to buy if prices fall in the near future. I think it could be a strong contender to fall given the raft of patchy data coming from the US. The rental equipment supplier makes 92% of revenues from North America.
It may drop heavily, in fact. But I’d expect Ashtead shares to recover strongly over the long term. The landscape’s rich with opportunity as major new infrastructure projects come on stream. And the company has significant scope and financial strength to capitalise on this through further acquisitions.
Over two-thirds of the US market’s controlled by smaller companies (ie those outside the four largest operators). This leaves Ashtead’s Sunbelt brand (which has an 11% market share) room for more significant expansion.
