Soaring inflation is causing stock market volatility to remain high right now.
Even the most experienced investor has been burned during this period of high economic uncertainty. And on Tuesday, the Bank of England warned that things could get even more choppy on share markets.
Bank warnings
In its latest Financial Stability Report, the Bank of England today warned that,
if inflationary pressures become stronger or more persistent than currently expected, it might lead to; weaker economic growth globally; a further sharp tightening in global financial conditions; and the potential for further volatility and stress in financial markets.
In particular, policymakers highlighted the impact that Russia’s invasion of Ukraine has had on inflation. It said that the economic picture has “deteriorated markedly” as prices of raw materials that come from the region have ballooned.
The bank added that “developments related to the Russian invasion of Ukraine are a key factor that will affect both the global and UK outlooks, particularly if energy and food prices rise further”.
What should I expect?
In this landscape, an investor needs to be braced for more volatility across the London Stock Exchange. The FTSE 100 has dropped 3% since the start of the year and experienced periods of extreme choppiness. Meanwhile, the FTSE 250 has tanked a whopping 21%.
This UK-focussed index has performed much worse due to sterling’s collapse and the bigger inflationary hit Britain is enduring. Latest consumer price gauges showed inflation is around half a percentage point higher here than in the US and eurozone.
Stock market corrections are nothing new. But as an investor I need to consider how events in 2022 will affect my near-term returns.
It’s not just further stock price meltdowns that I need to think about. The likelihood of worse-than-expected profits in the short-to-medium term also means that the dividends I receive could fall short of forecasts.
Why I’m still buying UK shares
Having said that, I still sincerely believe that stock investing remains a great way for me personally to create wealth.
This is because I buy shares with a view to holding them for years. And over the long term, stock investing is a proven way to generate solid returns. Studies show that the average investor gets an average annual return of 8% over a period of a decade and longer.
Because of this I’m using recent market volatility as an opportunity to go shopping for bargains. Many top-quality stocks have fallen heavily as markets move towards bear market territory. I can pick them up at bargain-basement prices today and potentially see them soar in value during the market recovery.
Remember that the number of Stocks and Shares ISA millionaires rocketed in the decade following the 2008 financial crash. I hope to follow their example and make gigantic returns by investing during the current downturn too. That’s even if the values of the shares I buy continue to fall in the near term.
