The UK’s lead FTSE 100 index is close to its highest-ever value.
And research shows that markets tend to perform well after they hit new highs.
A surprising truth
Cambria Investment Management’s chief investment officer, Meb Faber, did a study in 2019 and uncovered the surprising truth.
And that is, investing in the stock market near all-time highs can be a winning strategy.
Who’d have thought it? Many investors tend to do the exact opposite and look for lows before investing in stocks, indices and other financial instruments. And at first glance, the findings in the study do seem to be counter-intuitive.
But Faber pointed to data crunched as far back as the 1920’s, and the evidence is compelling.
I’m excited about the potential of the FTSE 100 and the stocks in its ranks.
One of the supporting factors now is that valuations are not excessive. In fact, the opposite is true. Many Footsie businesses are trading well but valuation multiples remain modest.
Another encouraging sign is that inflation looks as if it’s started coming down. And that likely means higher interest rates have been working to suppress the problem. So we may be near to the top of the rate-rising cycle.
It seems that a deep recession in the economy may be less likely than feared. And I’m optimistic that businesses will be able to thrive in the coming years.
A compelling value opportunity
The Footsie is in the 7,450 ballpark as I write (3 August).
But it achieved an all-time high of just over 8,000 as recently as 16 February.
So it’s around 7% below that highest-ever level. And that’s not much.
However, while I’m tapping away on this keyboard we are seeing a pullback in the markets. And it seemed to start when Fitch Ratings downgraded US debt from its highest AAA to AA+.
But a week is a long time in the markets. And my guess is the story will soon become old news and we’ll likely see the FTSE 100 bounce-back.
However, there’s no guarantee it will blast above its previous high anytime soon. Economies and businesses can bump into challenges and setbacks at any time. We only need think of the pandemic and the war in Ukraine to see the truth in that statement.
Nevertheless, uncertainties and risks don’t change the value opportunity. And I’m seeing low-looking valuations and decent business growth prospects for many companies in the FTSE 100 right now.
So I’ve been buying stocks and shares and other investments both inside and outside the Footsie.
For me, it’s important to diversify between different stocks in different sectors and to invest with a long-term perspective. I reckon such an approach can help to mitigate some of the risks and potentially sets up my portfolio for a satisfactory outcome over time.
