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Stock market rally: is it over? (And how I’d invest next)

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Screen of price moves in the FTSE 100
Image source: Getty Images.

Starting last November, the FTSE 100 index showed a sharp run-up. By around December end, the index was more than 18% higher than two months previously. The stock market rally turned around the fortune of more than one long-suffering stock. 

But January hasn’t been quite as good. 

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As I write this, the FTSE 100 index is down 3% from a month ago. In fact, the index has been losing ground daily from the second week of this month. 

So is it over?

So is the stock market rally over?

I think we investors can take heart from that fact that, on average, the index is still up by almost 3% from December. 

However, I am keeping in mind that while the stock market rally may not be over, it has definitely slowed down. 

Why has the stock market rally slowed down?

I think there are a number of reasons for the slow down. For one, the fresh lockdown for the UK economy isn’t exactly a mood lifter. The continued rise in coronavirus cases across the country is disappointing. And the unknown nature of the mutated coronavirus is causing fresh concern. 

Moreover, many FTSE 100 stocks have seen sharp increases in share price. Some are even at multi-year-highs. I think the euphoria of vaccine discovery had to, at some point, give way to more rational risk assessment. 

What will I buy next?

In my assessment, this phase of more measured investments could remain for months, if there are no other market-moving developments.

I think there are still plenty of savvy FTSE 100 investments to be made, that could hold me in good stead over the next few years. Here are two of them:

  1. Hikma Pharmaceuticals: This manufacturer of the Covid-19 drug, has had a good 2020. It sounded confident of its performance in its trading update in November as well. Its share price has risen over the past year, and is substantially higher than it was even during the pre-crisis time period. It also pays a small dividend. Yet, its price-to-earnings ratio is at 11.7 times. I think that investors will find it attractive once again as the rally continues. The big risk to it is from the return of complete bearishness to the financial markets, which spares no stock. This is a low probability possibility in my mind, though. 
  2. Unilever: The consumer goods biggie is one of the safest FTSE 100 stocks in my view. With well-diversified operations, a vulnerable UK economy impacts it in a limited way. It also pays a dividend, with a yield of 3.5%. Its earnings ratio is at 17 times, however. This could partly be because of a rush of investor money towards riskier stocks. Like HIK, it could also suffer if there’s another stock market crash, but I think like the last time around it could also bounce back well. I’m also impressed that well-known investment managers Lindsell Train like the stock.

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Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has recommended Hikma Pharmaceuticals and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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