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Last week was a good one for the FTSE 100, which closed 1.95% higher on Friday. It’s had a rejuvenating effect on my portfolio, even though London’s blue-chip index is still down slightly year-to-date and up only 1.76% over 12 months. Here’s why I think there may be more to come.
Why I’m optimistic
First, Interest rates have peaked. The Bank of England may be suggesting otherwise, but I think it’s done with rate hikes after inflation fell to 4.6% in October. Morgan Stanley expects the first cut in May. Goldman Sachs reckons February. Bring it on.
Falling rates will ease the pressure on businesses and consumers, possibly prevent a full-blown house price crash, and lift sentiment across the board.
And cash could lose its charm. Savers won’t celebrate falling interest rates as this will hammer the returns on cash. Bond yields could fall too. Dividends, by contrast, shouldn’t be affected. This will make today’s already generous yields look even better. The FTSE 100 currently yields 3.95%. For those who, like me, prefer buying individual stocks, it’s possible to get yields of 7%, 8%, 9% or more. While shares are riskier than cash, the potential rewards are far higher too.
Also, FTSE 100 shares are cheap. One upside of recent disappointing performance is that the FTSE 100 looks attractively valued, trading at just 9.2 times earnings. By comparison, the US S&P 500 trades at 24.94 times.
Investors have snubbed UK shares in recent years, including domestic savers, and I don’t expect the FTSE 100 to close the valuation gap with the turbocharged US market. Yet I still think it looks attractively priced.
Then there’s the fact that September and October are behind us. For reasons nobody can quite explain, stock markets tend to follow seasonal patterns. September is typically the worst month of the year. The S&P500 has fallen 0.5% on average that month, according to the Stock Trader’s Almanac, whose data stretches back to 1950.
October is better, with growth averaging 0.9%, but tends to be volatile. Black Tuesday, during the Wall Street crash of 1929, landed in October. So did Black Monday 1987. I’m glad those two months are now over.
Better times ahead?
November is the equal second best month (with April), posting an average increase of 1.5%. It’s doing well so far. December is the very best month of all, historically, with equities rising 1.6% on average. I’m hoping the pattern will repeat itself.
The mood could change too. We’ve had a tough few years, with the pandemic, war in Ukraine, the energy shock, cost-of-living crisis and now the Israel-Hamas conflict.
All these worries have weighed on stock markets. We’re due a change of tune. If we get it (which isn’t guaranteed) Say, shares could rebound with relief.
I’m well aware that forecasting share price movements is a mug’s game. There are simply too many variables. The Middle East conflict could spread, driving up the oil price. Interest rates and inflation could prove sticky. There could be another black swan event, swimming into view.
Yet I still think today’s low FTSE 100 valuations and high yields make now a good time to invest. I’m busily buying FTSE 100 shares ahead of a possible Santa rally. If we get one, I don’t want to miss it.