Will the UK stock market crash in May?

Investor optimism is high after the UK stock market enjoyed a strong April. Harvey Jones is wary about the month ahead though.

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April was a jolly good month for the UK stock market, as the FTSE 100 repeatedly broke all-time highs to close 2.57% higher than it began. UK shares have been out of favour for far too long. Investors had to sit up and take notice at some point.

I don’t think it’s any coincidence that the index is suddenly thriving after its underperformance made international headlines. The FTSE 100 is cheap, and investors have woken up to the opportunity.

Despite April’s strong showing, it still looks good value to me. The index trades at just 12.4 times earnings, roughly half the level of the S&P 500. Plus it remains a great source of income. AJ Bell forecasts an estimated ordinary dividend yield of 3.8% for this year and 4.1% in 2025.

On the up

Better still, investors could enjoy record share buybacks, with FTSE 100 firms already unveiling plans for £27bn of cash returns in 2024. If correct, that could lift the estimated total cash return to 5.3%. It could go even higher.

Some shares had a bumper April, including one I haven’t looked at in some time. Gold and silver miner Fresnillo (LSE: FRES) was the second-best FTSE 100 performer after Anglo American.

Anglo climbed a whopping 40.9% after BHP Group’s takeover plans broke. There was no such speculation surrounding Fresnillo. Instead, its shares were lifted by news that it is maintaining 2024 production guidance, despite a drop in output for the first three months of the year.

I’m surprised to see that the Fresnillo share price has actually fallen 16.99% over the last year, given that the gold price shot up 17.76% to break new highs, while silver is up 8.49%.

Gold miners behave in different ways to the yellow metal. Investors often treat miners as short-term speculative trades, while gold is a long-term store of value.

Plenty of risk

Mining gold carries plenty of operational risk. Seams run dry or fail to live up to hopes. Mines are usually based in risky parts of the world. Miners have high fixed costs but prices are volatile. As with every other commodity, the gold price is cyclical. Fresnillo’s shares look expensive today, valued at 23.92 times trailing earnings. That’s twice the FTSE 100 average. I’ll look elsewhere.

Not every FTSE 100 stock ended April higher. Two of my favourite portfolio holdings, wealth manager M&G and insurer Phoenix Group Holdings, had a rotten month. Their shares fell 9.59% and 10.64%, respectively.

I prefer buying stocks after they’ve fallen rather than climbed. It means they’re cheaper and their yields are higher, too. It reduces the risk of overpaying after a frothy month. M&G and Phoenix now yield 9.8% and 10.69%, respectively. I’m tempted to top up my holdings.

So will the stock market crash in May? Like everybody else, I’ve got no idea. However, I suspect it will give up some of its gains as we head towards the summer. That’s why I’d rather buy April’s losers, rather than winners. They’re cheap — and just look at those yields.

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.

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Fresnillo 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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