Stock markets began 2023 with a bang. The S&P 500 had its best January in 22 years, while the FTSE 100 broke the 8,000-point barrier for the first time.
However, an unfolding banking crisis has once again raised the spectre of an impending stock market crash. So what am I doing?
Building a cash position
I have always been a firmer believer in maintaining some dry powder in order to take advantage of bouts of irrationality in the stock market.
Most investors fear volatility. I thrive on it. Just as stocks can overshoot to the upside, so they can to the downside too. However, if I have no cash on the side-lines ready to deploy, then I can’t take advantage and buy my favourite stocks.
Take Glencore and Anglo American. Both stocks have crashed 20%+ in just six weeks. Yet their long-term growth story is still very much intact, in my opinion. That’s why I snapped up both shares recently, even though there’s a risk they could fall further.
Retail investors remain bullish
A recent survey of over 1,700 retail investors by Finimize highlight that many remain unfazed by recent stock market volatility. Three key headlines stood out for me:
- 64% are planning to invest between $5K-$50K into the markets in the next 12 months
- 68% think the global stock market will be higher a year from now
- Apple, Microsoft and Nvidia were cited as the top three stocks to buy over the next 12 months
There are undoubtedly reasons to be cheery. For a start, we look to be getting close to the peak in interest rates. The latest 25 basis point increase by the Bank of England is nowhere near as aggressive as previous hikes.
The Office for Budget Responsibility recently revised up its estimates, predicting the UK economy would avoid a recession. Then there was a surprise uptick in retail sales of 1.2% in February.
Falling inflation
Clear evidence is beginning to emerge that inflation is set to fall throughout 2023. Tumbling oil and gas prices could soon be reflected in consumers’ fuel bills, which could fall to around £2,000 by the summer.
Falling inflation will mean central banks are able to cut interest rates. If this indeed plays out, the cost-of-living crisis could be in the rear-view mirror by the end of the year. If this turns out to be the case that would boost consumer spending and, with it, economic growth.
Of course, nothing is certain when it comes to predicting the future. However, the stock market is forward-looking and will not be waiting for definite proof that a turnaround is materialising before beginning to march higher.
Therefore, I’m seeing this present bout of stock market volatility as my friend. A long-term investing horizon can help me weather short-term turbulence and build my wealth over time.
