The track record of stock markets worldwide shows that recoveries are some of the best times to go shopping. Even after the worst bear markets, shares of top-notch enterprises have a habit of surging to new heights in the long run.
And tremendous wealth can be unlocked for those smart enough to grab them while they’re cheap.
Has a new bull market already started?
The stock market’s performance has been less than ideal in the past couple of weeks. Following Fitch’s debt-rating downgrade of the United States, pessimism is again on the rise.
But frankly, the shift from AAA to AA+ is pretty much a nothingburger for long-term investors. Fun fact: the same thing happened to the UK in 2013, and the FTSE 100 has since almost doubled investor’s money. And that’s after a stock market crash as well as a correction in the last three years.
Zooming out a bit further reveals UK shares are already up by double digits since October. And with inflation starting to cool, the underlying economy is on the mend, with a recession looking less likely with each passing month.
While it’s too early to tell, these could be strong indicators that the recovery is already underway and that we may be nearing, or in, a new bull market.
If that’s the case, then history shows that snatching up dirt cheap shares in high-quality enterprises today will pave the way for higher returns. After all, buying low and selling high is the ultimate strategy for making money in the stock market.
Cheap shares versus alternative asset classes
For the last decade, savings accounts and bonds have been fairly insignificant tools for building wealth. Even as defensive instruments, the lacklustre returns failed to keep up with normalised inflation, resulting in wealth destruction, albeit by small amounts.
Today, that situation has obviously changed. Higher interest rates mean that savings accounts and bonds offer more significant gains. And both asset classes carry lower risk levels than stocks. But while their appeal has increased significantly, cheap shares provide far greater capacity for building wealth.
In other words, while the risk is higher, so is the potential reward. And once confidence rebuilds momentum within the equity markets, capital has historically shifted towards stocks, accelerating the recovery exponentially.
The short term remains murky
The long-term picture of the stock market looks bright, in my opinion. However, there may be several speed bumps along the way. While inflation is cooling, the interest rate hikes have started taking their toll on businesses.
Consequently, the number of bankruptcies in the UK is on the rise, and large banks like Lloyds are already writing off hundreds of millions of pounds in bad loans.
Further interest rate hikes by the Bank of England will likely exacerbate the situation, making it even harder for businesses to recover. This is especially true for companies with high levels of leverage.
Predicting what will happen in the coming weeks or months is impossible. The stock market may decide to take another nosedive, making cheap shares even cheaper.
Therefore, I’ve been spreading my buying activity over several months and will continue to do so. That way, if things do take a turn for the worse, I’ll still have the capital to snatch up top-notch stocks at even lower prices.
