The FTSE 100 may have escaped a seasonal crash in September, but the stock market is still under pressure from all sides.
In the US, the S&P 500 fell 7% last month, over fears that interest rates would stay higher for longer. It has steadied itself in October, but neither market is showing signs of forward motion at the moment. The Israel-Hamas conflict isn’t helping, but primarily, investors are worried about interest rates.
Mr Market has spent the best part of 2023 wondering when central bankers will stop hiking rates, and possibly start cutting them instead. We still don’t know. Opinions change with every new piece of data, and every hint or rumour from the US Federal Reserve or Bank of England.
Strange days
Higher interest rates are driving up bond yields, giving investors a decent return without having to take a risk on equities. The same applies to savings accounts. When markets are lacking direction, it can be tempting to lock into a best buy fixed-rate bond paying 6% over one year or 5.8% over five years.
Shares carry more risk but, in my view, offer far greater long-term opportunities. But we can no longer rely on easy monetary policy to do the heavy lifting. Those days are over.
I think this strengthens arguments in favour of buying individual stocks, rather than simply tracking indexes, say, through an exchange-traded fund (ETF). That’s what I’m doing, targeting ultra-high yielding shares like Legal & General Group and wealth manager M&G. Even if their shares continue to trade sideways, or even dip, I can still look forward to juicy yields of 8.89% and 9.95%, respectively.
By re-investing every dividend I receive straight back into the stock, I will build up my stake while share prices are low, and reap the rewards if and when they recover. The problem is I don’t know when that will be. Nobody does.
Future shock
The stock market is on a knife edge. It could go either way. Arguably, it’s always like this. Just more so today.
The US economy continues to run hot, despite constant Fed tightening. Engineering a soft economic landing will be tough.
Most analysts do not expect the first interest rate cut until the second half of next year. This means we’re likely to find ourselves playing the same guessing games in 2024 as we are today. On the other hand, we are still waiting for the full impact of tighten monetary policy to be felt. There’s a chance it could suddenly hit, triggering a recession. In that case, central bankers could be forced to cut interest rates in short order, which may finally bring on that recovery.
Despite all these worries, I’m feeling optimistic. The end of the year is usually the best time for investors, and it’s getting closer. That’s why I’m busily buying shares today, despite all the uncertainty. They look cheap, and the sooner I start re-investing my dividends, the better.
I don’t now when the recovery will come, but I want to be ready when it does. History shows it always arrives in the end.
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Harvey Jones has positions in Legal & General Group Plc. The Motley Fool UK has no position in any of the shares mentioned. 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.
Motley Fool UK 2023