After a positive start to 2023 which saw the FTSE 100 burst past 8,000 in February, the stock market rally ran out of steam. As I write this, the index trades at exactly 7,500. It hasn’t exactly crashed, but it hasn’t built on its early gains, either.
The FTSE 100 is up over 12 months, but only by 2.57%. We’re in the summer doldrums, so what we can we expect at the start of July?
It’s been a so-so year so far
With the glaring exception of a handful of US technology stocks that investors expect to benefit from the artificial intelligence revolution, this has been another tough year. The Ukraine war drags on, inflation is sticky, China’s post-Covid rebound ran out of puff in Q2 and a recession looms in the US and Europe.
UK inflation is proving stickier than expected, forcing the Bank of England to repeatedly hike interest rates and threatening a house price crash. We’re picking up the bill for years of stimulus and easy money, and it’s going to be hefty.
The FTSE 100 can rise above domestic concerns as companies listed on the index generate three-quarters of their earnings overseas. Yet they’ve been knocked by the resurgent pound, which is up 4.57% against the US dollar year-to-date, and 2.51% against the euro. This will shrink the value of overseas earnings once converted back into sterling.
After recent falls, the FTSE 100 looks cheap, trading at around 9.9 times earnings and yielding 3.6%. That looks like a tempting entry point, and offers some protection against further bad news.
Personally, I think today’s inflation concerns have been overdone, and price growth should retreat in the months ahead. We may be at the point of maximum misery, although these things are impossible to predict with absolute certainty.
What I do know is that the index is packed full of stocks on sale at bargain valuations, such as Lloyds Banking Group, a favourite holding of mine. It trades at just 5.6 times earnings but is forecast to yield 6.6% this year and a thumping 7.25% in 2025.
A lot of shares to buy
I’m planning to buy global mining giant Rio Tinto in July, which is also cheap, trading at 7.7 times earnings with a forecast yield of 7.4%.
Paper and packaging specialist DS Smith is another cheap FTSE 100 stock on my buy list, trading at 6.2 times earnings and yielding 6.7%. All of these companies have challenges, of course, but they’re regularly increasing their profits. I could list more but this article would be in danger of turning into a list.
I think the summer slump could continue through July and August, but it won’t last forever. Spirits should rise when there are clear signs that inflation is on the run. I think this makes the summer months a terrific time to buy FTSE 100 stocks, ahead of the eventual rally, rather than afterwards when they’ll cost a fair bit more.
I’ll reinvest all my dividends to build my stake until that happy day comes. Which it will, given time.
