The stock market is about to enjoy a “healthy and sustained rally” and investors need to be ready for it. I’m not the one making predictions here, this one is from Daniela Hathorn, senior market analyst at Capital.com.
It does echo my thinking, though. It’s been a tough 18 months for investors, but the outlook is brightening faster than many realise.
I’m ready for a recovery
Hathorn notes that “stock indices have been building bullish momentum over the past month”, as banking crisis fears fade. Traders now reckon US interest rates will start falling by the end of the year, and this will be a bullish signal for markets.
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When interest rates and borrowing costs finally slide, investors expect markets to soar. Basically, it’s a green light saying inflation is dead, the downturn is over, and the sunlit uplands are in sight.
Yet to reach that happy state, we have to suffer a little pain first. While the UK now seems likely to avoid a recession, the US may not be so lucky. At some point, though, that rally will come.
To a degree, it’s already started, Hathorn says. She actually thinks it has overshot slightly and markets may consolidate over the coming days, but that’s a good thing as it will lay the groundwork for that healthy and sustained rally.
I love reading and writing about macroeconomic predictors, but I don’t pay much attention to them when it comes to buying shares. Timing the stock market is impossible, by and large, but there is one indicator I do go by.
I like buying shares when they look cheap. I felt there was an opportunity last October, when the FTSE 100 fell to around 6,800. I had a little splurge, buying Lloyds Banking Group, housebuilder Persimmon, mining giant Rio Tinto, and Rolls-Royce.
There’s great value out there
Today, with the index up around 1,000 points, all have climbed nicely while the Rolls-Royce share price has almost doubled. Soon my dividends will start flowing, too.
The FTSE 100 isn’t as cheap today as it was then, but it still has room to grow. I prefer to buy individual stocks rather than a tracker, and many of them now look incredibly good value.
Barclays trades at just 5.1 times earnings, while Barratt Developments (5.8 times), Legal & General Group (6.5 times), Shell (7.7), and BT Group (7.7) also look dirt cheap. I would happily add any of these to my portfolio today, if I had cash to spare.
Of course, Hathorn could be wrong. Markets could be rattled by some unexpected bad news, and crash rather than rally. It’s an ever-present risk. Or one of my stock picks could unleash a profit warning or some other balance-sheet nasty, with disastrous effect on the share price.
These are the risks every investor takes, at any time. Yet over the long run, history shows that shares are one of the best ways to build wealth. The stock market will rally again, and I’ll be buying cheap shares before, during, and afterwards.
