Now that investors have regained some of their losses, the feel good factor is back.
After enduring a nearly unprecedented market drop over the past couple of years, it looks like investors have finally caught a bit of a break. Since last March, the FTSE 100 has staged a healthy comeback, rising over 40% from its lows, and now standing above the hallowed 5,100 level.
The feel-good factor is back in the stock market. I know I feel better, now I've recovered some of my losses. I've even splashed out some cash and moved myself into the 21st century by replacing my very basic Nokia phone with an Apple iPhone. I'm such an early adopter (not!).
As somewhat of an aside, if ever there was a contrarian cue to buy Nokia shares and sell Apple shares, that was probably it. Me spending it large is probably also a contrarian sign that the stock market is due for a correction.
Dark Clouds
Many people seemingly agree that dark clouds may be looming. The run-up in the market has been so strong and so quick that it's natural to think we may be due a correction.
Neil Cumming, an investment director at PSigma Investment Management, was quoted on Citywire as saying…
"Anyone who bought at the bottom at the beginning of March when the market was 3,650 is sitting on a 40% profit. At some point, markets will have a correction when people take profits. There has been a great run on the market but we will get to a price level where sellers in equities emerge. There could be a catalyst that causes people to take profits."
Also on Citywire, Schroder Mid 250 manager Andy Brough is quoted as saying…
"It is therefore important to remember the next couple of years are likely to be tough for many UK companies, with profits growth a challenge as the economy takes time to return to strength."
As if to emphasise the latter point, leading High Street retailer Next (LSE: NXT) said in their half year results…
"Consumer and mortgage lending has been tightened and many are choosing to save more even if credit is available to them. The overall effect has been for spending to remain subdued despite the significant benefit of mortgage interest cost reductions being passed on to many borrowers. Even if the economy technically comes out of recession we can see no reason for the consumer outlook to significantly change through the rest of this year."
Armageddon Avoided
On the bright side, at least the economy is not as bad as it could have been, Next also saying…
"Some assumed that a cataclysm in the financial markets would lead to a similar crisis in consumer markets -- this has not been the case. It's been a recession not Armageddon."
The market certainly focused on the positives rather than the negatives, sending Next shares up close to 7% on the day. The shares trade on a forward P/E of around 12, still less than the average they traded at during the go-go years prior to the 'annus horribilis' that was 2008 and early 2009.
Don't Miss This Action
Such historically low valuations are partly what's driving this market higher. You also get the sense more than a few investors have been caught sitting on the sidelines, and now the market is rising, don't want to miss out on the action.
Typically such behaviour is a precursor to a correction, although it must be said, such behaviour can go on for much longer than you can imagine, potentially pushing the market higher still.
Having said that, predicting the short-term movements of the stock market is a mug's game (I have been that mug). Even so, if you are still worried about suffering through another market correction, but don't want to abandon the market completely, you can stock up on some industry-leading, defensive consumer plays like Unilever (LSE: ULVR), British American Tobacco (LSE: BATS), or Diageo (LSE: DGE).
Burning Up The Charts
These types of shares may not burn up the charts, but they will provide solid prospects for appreciation, a decent dividend yield, and have meaningful downside protection.
Even if shares do suffer another drop, the odds are incredibly good that the market will make up that ground, and then some, in the long run. It's not easy to stay disciplined in these volatile and unpredictable times, but the rewards for those who do should ultimately be good.
More on the economy and the markets:
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> Of the companies mentioned in this article, Bruce Jackson has an interest in Apple shares.
