Victoria Scholar's advice on how to survive a stock market crash
Yesterday was a great day for the FTSE 100, which reversed its recent declines to end the day 1.72 percent higher. The US joined in the fun too, with the S&P 500 ending the day 1.45 percent higher.
Experts are now alerting investors to a potential “late summer stock market rally” as inflation slows, interest rates peak and the Chinese authorities act to save their embattled economy from total meltdown.
The FTSE 100 hit a two-week high yesterday, says Victoria Scholar, head of investment at Interactive Investor. “It’s now rising again, taking its cues from a strong session on Wall Street.”
Yet just a couple of days ago, investors were down in the dumps. August has mostly been a tough month amid fears that interest rates will have to rise much higher to curb inflation.
At the same time, the bankruptcy of Chinese property Evergrande Group with debts of $300billion (£238billion) threatened financial contagion.
London’s FTSE 100 and New York’s S&P 500 had fallen around 3.5 percent this month before yesterday’s rally.
It’s a strange time for sentiment to improve given that we are heading into September, which history shows is the worst month of all for the stock market.
Figures dating back to 1928 show Wall Street falling an average 1.12 percent in September, when most months are positive.
Yet optimistic is now flooding back, said AJ Bell investment director Russ Mould.
Markets ended last week on an upbeat note after US Federal Reserve chair Jerome Powell was not overly hawkish about interest rate hikes on Friday. “This has helped create the conditions for a late summer rally.”
Yesteday’s news that Chinese policy makers have ordered banks to cut mortgage rates to ease the property crisis and halved stamp duty on stock market trading has raised hopes of further support and stimulus, Mould says. “For the time being, Beijing is at least doing enough to restore sentiment.”
UK stocks returned from their August bank holiday with a lot more vim and vigour as a result. “Every stock in the FTSE 100 bar one was in positive territory early on, led by stocks with Chinese ties,” he adds.
In a further boost, price rises in British shops have slowed to their lowest since October last year. While they still climbed 6.9 percent in the year to August, this was down from 8.4 percent in July.
Easing grocery price inflation is giving Bank of England policymakers “food for thought” when they set interest rates next month, said Susannah Streeter, head of money and markets at Hargreaves Lansdown.
“Wages are still rising and markets are pricing in another two interest rates hikes from today’s 5.25 percent to 5.75 percent. However, we’re in a fluid situation and forecasts keep being reassessed.”
So could brighter times lie ahead, both for the stock market and wider economy?
Personally, I don’t think we’re there yet. We still don’t know what will happen to interest rates. As long as there is a chance that borrowing costs will climb even higher, most investors will keep their powder dry.
Rising mortgage rates are putting pressure on the housing market, with UK sales now falling to a 10-year low.
House prices haven’t crashed, yet, but further falls are expected.
I’m also worried about all the hype around AI. This has provided the one bright spot for investors this year, with tech stocks such as Nvidia absolutely rocketing, but now valuations look a little overstretched.
I’m also concerned about the Chinese economy, which still looks vulnerable. Yesterday Evergrande’s shares resumed trading after 17-month suspension. They fell by £2billion.
September could spring some nasty surprises. Much now depends on where inflation goes next, with the next UK consumer prices figure due on Thursday September 14.
Let’s hope we see another sharp drop from July’s 6.8 percent. If we do, then the rally could really be on.
But if inflation and interest rates look set to remain stubbornly high, it could bring a swift halt to the fun.
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