The sun is out but the stock market is going nowhere. What should you do now?
Stock markets continue to mark time. Since soaring above 4,500 in early May, the FTSE 100 has steadily sunk back to around the 4,200 mark. The fun police are out in force -- the euphoria of the 30% rise in 8 weeks just had to be stopped!
So what's happened? Why the malaise?
Guessing the short-term movements of the market is a mug's game. But at the risk of bringing more public ridicule onto myself, I'll hazard a few guesses…
- Traders have all got sun-stroke and are resting their frazzled foreheads and brains.
- Everyone is camped out on Murray Mound hoping Scotland's finest can lift the Wimbledon trophy. In contrast, the stock market is a mere distraction.
- As the old saying goes, investors sold in May and went away, not coming back until St Leger day in September. In the meantime, they are happy to let the market drift.
- More likely, the easy money has already been made, and now investors are sitting on the sidelines. They're happy with the gains they made during The Big Bounce, but obvious stock market bargains are now much harder to find.
Which brings me to the first of the big investing dilemmas facing investors today…
Dilemma #1: Is now a good time to invest in the stock market?
Regular readers of my guff will know I'm relatively cautious about the stock market right now. I think some of the recovery stocks may have run too far too fast, especially as the economy continues to face strong headwinds. For example, I sold my entire holding in Barclays (LSE: BARC) a couple of weeks ago.
Yet at the same time, I think the market is offering us some good each-way bets, like Tesco (LSE: TSCO). Just because the market might head south, or just because some stocks like HSBC (LSE: HSBA) look expensive and should be sold, it's not a reason to completely avoid buying shares.
Such two-tier markets are not unusual. The most obvious recent example was during the dot com boom, when everything TMT (technology, media and telecoms) flew higher whilst everything else was left behind. Eventually, "everything else" caught up and passed the over-valued TMT stocks.
Dilemma #2: Is deflation or inflation our biggest threat?
Last week, we had yet another pundit add to the inflationary chorus. This time, it was none other than Alan Greenspan, ex-head of the US Federal Reserve, saying "…I see inflation as the greater future challenge….over the next decade given the pending avalanche of government debt about to be unloaded on world financial markets."
Yet there are still plenty of people, including current Fed Chairman Ben Bernanke, who think deflation is our bigger threat. Admittedly, Bernanke is fighting the battle today, and today's fight is all about reflating the economy. Bernanke is going to fight inflation another day.
Given the ultra-low interest rates and the huge co-ordinated government stimulus packages across many countries, most people think the global economy will recover. I'm with them.
But the big question now is "what happens when interest rates inevitably rise?" Base interest rates going from 0.5% to 1% doesn't sound like a big jump, but in percentage terms, it is a doubling.
What happens when mortgage repayments start rising? What effect will it have on consumer spending and on house prices? What will happen to the stock market? Dividend yields of 5% and 6% on stocks like Centrica (LSE: CNA) and Pearson (LSE: PSON) may not look as quite attractive when interest rates are higher than they are today.
What To Do?
It's at times like these you need to remember these three key points…
1) The future is always hard to predict.
2) Investing should always be viewed over the long-term. In 10 years' time, we'll have recovered from this recession and the stock market should be higher than it is today, possibly substantially so.
3) Remember we've just been through one of the biggest stock market falls of all time. It's not always this bad.
Your best bet today is to continue to regularly invest in the market. Do it monthly. Contribute to an index tracking fund, use The Motley Fool's ShareBuilder share dealing service (£1.50 commission a trade) or buy more shares of your favourite companies. If the share market falls, your money buys you more shares. If the market rises, your existing portfolio rises in value.
Over the long-term, buying shares today, we should all be winners. Just invest regularly, and invest in quality.
More on the economy and the markets:
> Bruce Jackson does not have an interest in any of the companies mentioned in this article.
