The stock market rally since last year’s Covid crash has been nothing short of stunning. The FTSE 100 is now back above 7,000, a rise of 40% since the market low on 23 March 2020, when the index dipped below 5,000.
During the crash, I wrote umpteen articles explaining why I was taking the opportunity to buy cheap shares. At The Motley Fool, we believe a market meltdown is an unmissable opportunity to pick up our favourite shares at knockdown prices. We then aim to hold them for the long term, to benefit from the ensuing stock market rally.
We do that for two reasons. First, when markets fall, good companies are sold off with the bad. Second, history shows that share prices recover, if you give them time.
This stock market rally is breathtaking
I never buy shares with the aim of making a fast buck. My plan is to hold for a minimum of 10 years, to give them time to show their worth. Over such a lengthy period, even a major crash like last year’s can look like a blip. But if I’m buying a stock at a 30% discount, it should multiply my rewards during the stock market rally.
The question now is whether I have left it too late to buy more shares. Can this stock market rally continue? There’s a short answer. Nobody knows. It’s impossible for anyone to second-guess stock market movements, with any hope of consistent success. Nor can any computer. There are just too many variables.
Right now, I can see plenty of reasons why stock markets may continue to rally. We are only just coming out of lockdown. People have pent-up savings and want to spend them. Trillions of dollars in stimulus is washing around the global economy. Many stocks are still cheap.
Nobody knows what happens next
I can also see reasons why we might face a stock market crash, rather than a rally. Stock markets have priced in a rapid recovery, and some shares look overvalued. Many countries have yet to shake off Covid, and mutant variants could set back the global recovery. Inflation may take off, forcing central bankers to hike interest rates, and squeezing growth.
I can’t control where the stock market goes next, so I broadly ignore it. Instead, I focus my attention on hunting down the best stocks to buy for my portfolio. I favour companies with healthy balance sheets, minimal debt, loyal customers, and steady, rising profits.
I also check their valuations to make sure they are not too expensive. Then I prioritise companies with strong defensive moats that make it hard for competitors to steal market share.
I sometimes worry that the stock market rally has been overdone. That’s why I invest a regular monthly sum, to reduce the risk of buying at the very top. I also make the odd lump sum investment, when I have cash to spare or spot a good opportunity. There are still plenty out there.