Back in February, the FTSE 100 index broke 8,000 points for the first time ever. Yet by March, it had shed over 600 points. This dip to around 7,400 points proved to be a smart buying time for investors. Just a month later, the market had risen to 7,900 points. Yet events over the past couple of weeks are pushing the market lower, making me think that another great dip is around the corner.
Short-term bearish factors
Before getting in to why I feel this is a dip rather than the start of a deeper crash, let’s run through the reasons behind the fall below 7,500 points.
One of the main factors at play is the continued concern about inflation here in the UK. The latest reading did finally show inflation below 10%. Yet it came in above expectations, hitting 8.7%. This is still very high, continuing to put pressure on corporate costs and squeezing profit margins.
A factor that links to this is higher interest rate expectations. I was scoffed at by some friends a few months back for calling for 5% interest rates by autumn. Yet market experts are thinking it could now go as high as 5.5%! This shift in rate forecasts (needed in order to bring inflation under control) isn’t great for the stock market. Higher rates makes it more expensive for businesses to raise new debt and service existing.
Why I’d buy this dip
When I compare this move back close to the levels of the market back in March, I feel this is a much better time to buy stocks. Back in March, we weren’t close to peak interest rates by the Bank of England. The cost-of-living crisis was a lot more pronounced than it is now. Finally, we hadn’t had the first round of Q1 earnings from companies to see how the start of the year was going.
Since then, some pressures remain. Yet I feel we are further down the curve regarding economic uncertainty. The future is still uncertain, but the UK economy has a clearer path. For example, energy prices have stabilised at a lower level.
The majority of corporate earnings have impressed me. As for peak rates, I personally think 5-5.5% will be the top. Any more than this and it could start to really hurt the economy and I don’t feel policymakers will allow this to happen.
Put another way, I think peak investor pessimism has passed. Therefore, I expect the stock market to move higher into the summer and beyond as the amount of negative surprises are reduced.
Where to put money to work
Even with a view of the overall market coming higher, I have some favourite areas. High interest rates should provide a continued tailwind for UK banks to grow their revenues.
Aside from finance, I think it could be the time to start to invest small amounts in property stocks, given the fall in some of the homebuilders.
