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He FTSE 100 It may have escaped a seasonal crisis in September, but the stock market is still under pressure from all sides.
In the USA, the S&P 500 fell 7% last month, on fears that interest rates would stay high for longer. It stabilized in October, but neither market is showing any signs of moving forward at this time. The conflict between Israel and Hamas does not help, but what worries investors most are interest rates.
Market has spent most of 2023 wondering when central bankers will stop raising rates and possibly start cutting them. We do not know it yet. Opinions change with each new piece of information and with each hint or rumor from the United States Federal Reserve or the Bank of England.
Strange Days
Higher interest rates are pushing up bond yields, giving investors a decent return without having to take risks with stocks. The same applies to savings accounts. When markets lack direction, it can be tempting to stick with a best-buy fixed-rate bond that pays 6% in one year or 5.8% in five years.
stocks carry more risk but, in my opinion, offer much greater long-term opportunities. But we can no longer rely on loose monetary policy to do the heavy lifting. Those days are over.
I think this strengthens the case for buying individual stocks, rather than simply following indices through, say, an exchange-traded fund (ETF). That’s what I’m doing, targeting ultra-high yield stocks like Legal and General Group and wealth manager M&G. Even if its shares continue to trade sideways, or even fall, I can still expect juicy returns of 8.89% and 9.95%, respectively.
By reinvesting every dividend I receive directly into stocks, I will increase my stake while stock prices are low and reap the rewards when they recover. The problem is that I don’t know when it will be. Nobody does it.
Future impact
The stock market is on a knife edge. It could go either way. You could say that it is always like this. Even more so today.
The US economy continues to overheat, despite constant tightening by the Federal Reserve. Achieving a soft economic landing will be difficult.
Most analysts do not expect the first interest rate cut until the second half of next year. This means that in 2024 we will likely find ourselves playing the same guessing games as today. On the other hand, we are still waiting for the full impact of tight monetary policy to be felt. There is a chance that it could happen suddenly and trigger a recession. In that case, central bankers could be forced to cut interest rates before long, which could ultimately trigger that recovery.
Despite all these concerns, I feel optimistic. The end of the year is usually the best time for investors and it is getting closer. That’s why I’m busy buying stocks today, despite all the uncertainty. They look cheap and the sooner I start reinvesting my dividends, the better.
I don’t know when recovery will come, but I want to be ready when it comes. History shows that it always comes to the end.
