As of August 14th 2009 the FTSE 100 is currently over 4700 and the Dow Jones is as high as 9400. We’re coming up to the end of the quiet summer months and volatility is likely to increase as is normally the case in the Autumn months. So with the economy looking a lot healthier, is now a good time to start investing in the stock market again?
Well my own view is that despite the current market strength, it’s far too soon to start ploughing your money back into stocks. The stock markets are pretty fairly priced right now in my opinion and so there’s little value to be had in any of the major stock market listed companies.
To some extent the fact that the major stock market indices such as the FTSE 100 and the Dow Jones are trading so high, suggests that any economic recovery that we may see in the coming months is already factored into the current market price.
It’s hard to disagree with the fact that the economy will be a lot stronger at some point in the next few years, so as a consequence of this the world’s major stock markets are likely to be trading much higher than they are at the present time. However if you are investing in shares for the long-term you really want to be buying stocks when they are undervalued.
This is determined by looking at things like PE ratios and the ratio of market capitalization to profits. You should try to invest in companies that are undervalued according to present and historic data. Unfortunately the the recent surge in the markets has lifted the price of many of the major listed companies.
Therefore you might like to either wait and see if there is a market retracement so many shares are a lot cheaper, or invest in some of the smaller companies that are not so directly impacted to the movements of the wider stock market.
With regards to the first point, a market correction certainly cannot be ruled out because we have risen far higher than many analysts were expecting, and so a a sell-off of some description could well be imminent.
Small-cap companies probably offer a little more value right now because there will always be a few bargains to be had. The only problem you face is that in tough trading conditions, like the ones we are experiencing at the moment, these fledgling companies are very high risk investments because very few of them come through a recession unscathed.
So overall my own view is that your best bet is to invest in fundamentally sound companies that have a long record of earnings and dividend growth. However I don’t necessarily think now is a great time to invest because I think the markets will probably fall back once more before we start to see a sustained rise (this is only my opinion and does not represent financial advice).
A better approach may be to focus on short-term trading instead. Whatever you do, it’s important that you keep up with all the latest online trading news and economic data in order to help you forecast where the markets may be headed in the future.
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