On Tuesday, August 22, the FTSE 100 managed to break its losing streak, having spent seven straight days in the red.
Wednesday is also proving to be a more positive one for the stock market. Given that the index shed several hundred points during the period, it does represent an opportunity to buy the dip.
Here are several reasons why I believe this is a smart move.
Inflation continues to fall
The inflation reading for July showed another decent drop versus the prior month, falling from 7.9% to 6.8%, decelerating at a fast pace. If this continues into the autumn, I feel the stock market will climb to higher level than it is now.
The reason for this is that easing inflation acts to reduce costs for businesses. This ranges from less pressure to raise wages to having better profit margins on goods sold. Granted, prices are still rising. And by comparison to the rate of inflation most businesses factored in at the start of the year, the latest fall is a huge benefit.
History is in our favour
When I look back over the past year, there have been four similar sharp dips in the FTSE 100. These occurred in December, March and July. On each occasion, the index dropped to the between 7,200 and 7,300, before bouncing back as the dip was bought.
I completely accept that past performance doesn’t guarantee the same thing will happen this time. Yet the fact that we are starting to move higher from this same level again does indicate to me this is the price that long-term investors are looking to step in at.
Interest rate expectations stalling
Last month, I moaned about how some were forecasting interest rates to hit 6% early next year. From the current level of 5.25%, that thought was clearly spooking some investors. Yet as we currently stand, it does seem 6% is going to be the peak.
With the data releases over the past couple of weeks, there’s nothing there to suggest the Bank of England needs to go even further.
What a lot of investors want to know is roughly when and where interest rates will top out at. If the central bank signals next month that 6% is the expected high, then I believe more will pile into the stock market.
A concern to note
Before I get to point four, I have to say that the stock market could reverse the gains of yesterday and continue to head lower. This could be triggered by comments by Federal Reserve members, who are meeting for the annual Jackson Hole symposium later this week. If they come out with rhetoric about raising interest rates further in the US, this could easily spook both the US and the UK stock markets.
Earning season was positive
Back with the positives, despite the short-term fall, most half-year results and trading updates in the past month from constituents were strong. Different sectors reported better-than-expected demand, which should act to support a good 2023 full-year.
For long-term value investors, the results will paint an encouraging picture of the health of the stock market. It will also enable them to see past the short-term noise and volatility.
In fact, buying this dip presents an opportunity that some (myself included) didn’t expect to have in August!
