Image source: Getty Images
Last week was good for him FTSE 100, which closed on Friday with an increase of 1.95%. It has had a rejuvenating effect on my portfolio, even though London’s blue-chip index is still down slightly so far this year and is only up 1.76% over 12 months. Here’s why I think there may be more to come.
Why am I optimistic?
First, interest rates have peaked. The Bank of England may be suggesting otherwise, but I think it has ended rate hikes after inflation fell to 4.6% in October. Morgan Stanley The first cut is expected in May. Goldman Sachs calculate February. Go ahead.
Falling rates will ease pressure on businesses and consumers, possibly prevent a complete drop in house prices, and improve confidence across the board.
And cash could lose its charm. Savers will not celebrate falling interest rates as this will affect the returns on cash. Bond yields could also fall. Dividends, on the other hand, should not be affected. This will make the already generous current returns look even better. The FTSE 100 is currently yielding 3.95%. For those, like me, who prefer to buy individual stocks, it is possible to earn returns of 7%, 8%, 9% or more. While stocks are riskier than cash, the potential rewards are also much greater.
Plus, FTSE 100 shares are cheap. One upside to the disappointing recent performance is that the FTSE 100 appears to be attractively valued, trading at just 9.2 times earnings. In comparison, the US S&P 500 it trades at 24.94 times.
Investors have scorned UK shares in recent years, including domestic savers, and I don’t expect the FTSE 100 to close the valuation gap with the turbocharged US market. However, I still think it has an attractive price.
Then there’s the fact that September and October are behind us. For reasons no one can fully explain, stock markets tend to follow seasonal patterns. September is usually the worst month of the year. The S&P500 has fallen 0.5% on average that month, according to the Stock Trader’s Almanac, whose data goes back to 1950.
October is better, with average growth of 0.9%, but it tends to be volatile. Black Tuesday, during the Wall Street crash of 1929, arrived in October. So did Black Monday 1987. I’m glad those two months are over.
Are better times ahead?
November is the second best month (along with April), with an average increase of 1.5%. It’s going well so far. December is the best month ever, historically, with stocks up 1.6% on average. I hope the pattern repeats itself.
The mood could also change. We have had a difficult few years, with the pandemic, the war in Ukraine, the energy shock, the cost of living crisis and now the conflict between Israel and Hamas.
All of these concerns have weighed on stock markets. A change of tone is due. If we succeed (which is not guaranteed), say, stocks could rebound with relief.
I am well aware that forecasting stock price movements is a fool’s game. There are simply too many variables. The Middle East conflict could spread, raising the price of oil. Interest rates and inflation could be difficult. There could be another black swan event, swimming into view.
However, I still think the FTSE 100’s current low valuations and high yields make it a good time to invest. I’m busy buying FTSE 100 shares ahead of a potential Santa rally. If we get one, I don’t want to miss it.
