Stock market warning! Why good news for share prices might be bad news for investors

The stock market has been responding positively to some good news lately. But Stephen Wright thinks investors need to be cautious.

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The stock market has been getting some good news lately. Interest rates have stopped rising, inflation has been falling, and GDP reports have been better than expected.

As a result, certain sectors of the market have been seeing a significant boost. But is this what investors looking to buy shares should be hoping for?

Good news

Over the last couple of years, the market has been under pressure from a couple of macroeconomic factors. One is inflation and the other is rising interest rates.

Higher interest rates weigh on share prices across the board, though some sectors have been affected worse than others. And central banks have been raising rates in order to try and bring high levels of inflation under control.

In the UK and the US, there’s been good news on both counts recently. The Bank of England and the Federal Reserve have decided to pause interest rate increases and inflation has started to come down.

This is causing optimism in the stock market. And there was more good news this week as the Office for National Statistics reported that UK GDP was essentially flat between July and September, making a recession unlikely. 

I think investors should view the news positively – some of the biggest risks to the market seem to be subsiding. But higher share prices also make it more difficult to find bargains.

Bad news

The downside for investors is that stocks that had been hit hard by rising interest rates have mounted something of a recovery as a result of the recent news. FTSE 100 bank Lloyds Banking Group is a good example of this.

During the first 11 months of the year, the Lloyds share price fell by 15%. Since the start of the month, though the stock has launched a recovery and is up 7.5% over the last few weeks.

For investors looking to buy the stock, this just means they’re going to have to pay more than they would have at the beginning of November. 

There’s another issue to consider as well. Rising share prices might well come back down again if further developments puncture the market’s current optimism.

While the UK has avoided a recession, economic growth is hardly surging. And with investors now turning their attention to the prospect of lower interest rates, there could be trouble if these take longer than expected to come.

How to invest right now

All of this makes me think the market is in a dangerous position right now. When investors were pessmistic, there were bargains on offer, but that seems less obvious now.

My plan, though, is to keep looking at individual stocks for investment opportunities. I’m looking to tread much more carefully at the moment, but there will always be quality stocks I can buy for my portfolio.

For example, if the Lloyds share price gets much higher, I’ll start wondering whether the risk of loan defaults is worth it. But with the stock still down 9% for the year, I think it’s still worth a look for investors.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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