There’s a nervousness in the City at the moment — and it threatens to turn into a rout. With concern about important factors from interest rates to Covid-19 infection levels, many investors are starting to worry about a possible stock market crash. While a correction is always possible, what about the opposite? Could now present a good time for me to buy stocks ahead of a possible 2022 stock market surge?
The stock market has performed strongly
The UK stock market has had a good run in the past few years. Over the past 12 months, for example, the benchmark FTSE 100 index has put on 12%, at the time of writing this article. That’s even after this morning’s sharp fall. The index is now more than 80% higher than its level in March 2009, in the depths of the financial crisis.
That hasn’t been an uninterrupted bull run, though. There have been quite a few significant pullbacks, including last Spring’s crash. So the market hasn’t totally detached itself from share fundamentals, in my view. A strong stock market run can presage a sustained slump, but I think that’s less likely if companies’ underlying businesses continue to perform strongly.
Many UK shares look cheap to me
Despite the strong performance over the past year, I reckon many companies continue to look like relatively good value. Well-known FTSE 100 members across multiple sectors — including Lloyds, Barclays, British American Tobacco, Legal & General, SSE and Royal Mail — trade on a price-to-earnings ratio in single digits.
That in itself doesn’t mean that those companies are good value. After all, the market could be pricing in the expectation of lower earnings in future. Nonetheless, I don’t think a market in which a lot of sizeable, profitable companies trade with P/E ratios in the single digits is systemically overpriced. I continue to see value for my portfolio in many UK shares.
Being greedy when others are fearful
A broad selloff can be a good time to find bargains in the stock market. Shares that are already good value can be even cheaper than before. That is why investor Warren Buffett talks of “being greedy when others are fearful”. Buffett thinks that other investors’ overreaction to market falls can create unusually attractive buying opportunities for his portfolio.
Could we see a 2022 stock market boom?
Given the current valuations of many UK shares, I actually think the bull run could continue into 2022 albeit with some bumps along the way. If the economy is strong, public health is well managed and consumer confidence persists, I wouldn’t be surprised if UK share prices continue to show positive momentum next year.
But, like Buffett, I’m not focussed on whether we will see a 2022 stock market boom. Instead of playing the market timing game, I am focussing on finding great companies at what I see as attractive valuations. Over the long term, I expect quality to out, no matter what happens in the short term. I have a shopping list of UK shares I like. So any stock market fall could give me an opportunity to buy them for my portfolio even cheaper than before!
Christopher Ruane owns shares in British American Tobacco and Lloyds Banking Group. The Motley Fool UK has recommended Barclays, British American Tobacco, and Lloyds Banking Group. 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.
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