Things have been looking positive in stock markets around the world. But is this optimism unrealistic and disconnected from reality?
We take a look at what’s going on in the markets to figure out whether you should be upbeat or wary about investing.
[top_pitch]
Why has the American stock market been going up?
After a brief rocky period, markets seem to have stabilised and are continuing their upward momentum.
A lot of eyes have been on America. As an economic superpower, what happens there tends to have a ripple effect around the rest of the world.
America’s central bank, The Federal Reserve, has repeatedly put out messages to make clear that it’s going to support the economy and the markets by any means necessary. This is good news for investors!
What about stock markets in the rest of the world?
Things are looking pretty cheerful elsewhere, considering we’re not quite on the other side of the coronavirus pandemic just yet.
Rupert Thompson, chief investment officer at wealth management company Kingswood, explains: “The IMF has just released its latest world economic outlook which was relatively optimistic.
“Its forecast for global growth has been raised to 6.6% and 4.4% for this year and next, with the US accounting for the lion’s share of the upward revision on the back of the large fiscal stimulus.
“Equally important, the IMF now believes that Covid-19 should cause considerably less long-term damage to the world economy than the global financial crisis. Emerging economies with the exception of China are expected to come off worst but somewhat incredibly, US GDP is now forecast to be higher in three years’ time than the IMF had been forecasting pre-covid.”
[middle_pitch]
Does this mean it’s a good time to invest?
Some might worry that all this good news has been priced into stock markets already. If this is true, shares may be trading at high prices. It might be the case that some of this forecasted growth has been included in valuations. However, growth isn’t a new thing.
Over the long run, economies expand and markets grow. So, even if prices include the expectation of growth, the future outlook can still be positive. Investing for the long term means that you’ll be able to take advantage of growth not just this year, but for many years to come.
There are lots of positive signs in global markets right now. But if 2020 taught us anything, it is to expect the unexpected. There’s no guarantee that markets will continue to expand. Who knows what might be waiting for us around the corner? So make sure you invest sensibly and understand that you may get out less than you put in.
How can I invest to take advantage of good news?
There are always going to be periods of good news and bad news throughout your investing lifetime.
Sometimes, you have to take the rough with the smooth. Positive and negative stock markets each carry their own risks for investors.
To give you the best chance of becoming successful, consistency can be your friend. Develop an investing strategy that suits your long-term goals and use a share dealing account to create a balanced portfolio. Ideally, create a portfolio that will perform well when news is good and minimise losses if things turn bad.
