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It may seem strange to worry about a stock market crash today, given that we just enjoyed a good old-fashioned Santa rally. However, there are serious reasons for concern as 2024 begins.
He FTSE 100 revived as hopes grew that inflation had peaked and interest rates would soon fall. I am optimistic on both fronts.
Another source of optimism is the investment hypothesis known as the “January effect.” This suggests the stock is more likely to rise this month than most others. However, the evidence seems a bit shaky to me. It seems to be largely limited to small caps, rather than the larger companies I primarily target.
It's a real mix
What impresses me most is the fact that the global economy has proven surprisingly resilient, despite Covid lockdowns, supply chain shortages, inflation and rising interest rates. While the US and UK could fall into recession, I think a soft landing is more likely.
He S&P 500 looks expensive after last year's 'Magnificent Seven' mega-cap tech rally, trading at 26.35 times earnings. However, UK shares are very cheap: the FTSE 100 trades at just 9.5 times earnings. At some point, they will surely have to recover some of the lost value.
The problem is not the economy but geopolitics. Until now, markets have calculated that the war between Israel and Hamas will not extend beyond Gaza. That explains why the price of oil has been falling lately. However, now that the United States is embroiled in direct conflict with the Iranian-backed Houthi rebels, we can no longer be sure of that.
The war in Ukraine seems to be going badly. A Russian victory would be demoralizing for the West. It would change control of Ukraine's vital grain supplies, potentially driving up food prices. It could also embolden China in its relationship with Taiwan. Alternatively, the country's housing market could collapse.
This is what I will do
The Western world needs a stable United States now more than ever. But the country faces a presidential election that could change its approach to its relations with the rest of the world.
As an investor, I can't do anything about it. I have no idea what is going to happen in today's crazy, uncertain world, nor the likely impact on the markets. If I wait for world peace, I will never invest a single cent because it will not come.
Probably the worst thing you could do is sell stocks out of fear of an upcoming crisis, only to find out that it doesn't happen. I'm not going to do that either.
Instead, I will do in 2024 what I did in 2023. I will buy very cheap, high-yielding FTSE 100 shares whenever I spot an opportunity. If we have a stock market crash in January (or February, or March…), I will buy even more because they will be cheaper.
I will then hold my dividends for the long term, meaning years or decades, and continue to reinvest my dividends to grow, until the day I need to withdraw them as income.
I will continue to do so in 2025, 2026 and beyond as well, regardless of whether we have an accident, as we surely will at some point. It's what markets do. They always recover, with time.