Is The Market Recovery Your Last Chance To Buy Cheap Stocks Or A Dead Cat Bounce?

Aah… so we can all breathe a sigh of relief. After five days of worry and wonder, stock markets are settling down in time for the weekend.

Anybody daft enough to listen to former Gordon Brown adviser Damian McBride, who urged his Twitter followers to go shopping for bottled water and tinned goods on Black Monday, can now creep out of their bunkers. They should have listened to the Fool instead, and gone shopping for shares.

The China crisis was quickly eased with a couple of interest rate cuts and easier lending rules for local banks. When US second-quarter GDP growth was upgraded from 2.3% to 3.7%, traders couldn’t contain themselves. In the UK, today’s figures published today show a 2.9% rise in investment growth added to the optimism. At time of writing on Friday, the FTSE 100 is nudging 6200 points, 6% higher than its closing number of 5845 on Monday. 

Still cheap

If you were considering buying cut-price shares on Black Monday, as we were urging readers to do, your bravery will have been handsomely rewarded. If you didn’t buy, don’t be too full of regrets because shares are still far cheaper than they were. Despite leaping 3.7% on Thursday, one of its best days ever, the FTSE 100 is still 12.6% cheaper than it was in April, when the index hit its all-time high of 7100.

Few investors can accurately time the bottom of a correction. It is far better to drip-feed money into the market, taking advantage of any dips. With since the FTSE 100 expected to yield 3.9% over the next year, up from a forecast 3.5% in May, now still looks a tempting time to buy.

No sell-out

There is always the possibility that this is the first growl of a bear market, rather than a short-term correction. But there are reasons to be positive. In the Eurozone, real M1 money supply is growing as European Central Bank president Mario Draghi’s newly-minted money starts to catch fire, which should fuel a GDP growth spurt. Oil and commodity investors are still hurting, but Thursday’s 10% leap in the oil price has given them a little respite. This week’s suggestion by William Dudley, president of the New York Federal Reserve, that the case for raising US interest rates in September is now “less compelling” may also buoy markets.

I hope none of you actually sold up on Black Monday. This is the worst thing you could do. The first problem is that you crystallise what were only up to that point paper losses. The second is that you then have to time your re-entry into the market, and the chances are you will leave it too late. Better to stand calmly on the sidelines than throw yourself onto the rollercoaster ride. Or as I wrote on Monday: Keep Calm And Carry On Investing Foolishly.

Can it!

All this week’s events have shown us is that stock markets behave as they have always done. They go up and they go down, sometimes very quickly. But in the longer run, if you are patient and re-invest your dividends for growth, they should ultimately make you richer.

It has been a dramatic week but has ended well. So kick back, cook yourself something fresh, and have a glass of your favourite tipple. You can save your canned food and bottled water for the next panic.


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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.