So far, 2022 has not been a good year for share prices. In general, the stock market is lower than it was at the beginning of January.
The FTSE 100 is 2.5% lower than it was at the start of the year, and the FTSE 250 is down almost 17%. Across the pond, the S&P 500 is down more than 18%.
Personally, I’m not expecting a meaningful recovery in the stock market in 2022. But I think that means that this could be a great year for investing in stocks.
Falling share prices
The main cause of falling share prices this year has been inflation. An already difficult inflationary environment at the start of the year has been made worse by the Russian invasion of Ukraine.
In response, central banks have been increasing interest rates. This has caused share prices to fall as keeping money in cash becomes increasingly more attractive.
So far, though, rising interest rates don’t seem to be having the desired effect on slowing inflation. The most recent reading from the UK indicates that prices are 7.8% higher than they were a year ago.
Recession
As a result, I’m expecting interest rates to continue to rise and share prices to continue to fall. Worse still, I think that rising interest rates are likely to bring about a recession.
If I’m right about that, then companies are going to report weak earnings as the economy slips backwards. In this case, I think it is likely that share prices will fall further.
The process of rising interest rates bringing about a recession and leading to weaker earnings is something that I expect to stretch into 2023. As a result, I don’t think that the stock market will recover significantly this year.
What to do?
So what should I do in this situation? One idea is to wait for stock prices to fall a bit more and then invest when I think they’re about to recover.
This doesn’t sound like a great plan to me, though. If I try to wait for prices to reach their lowest points, it’s highly likely that I’ll miss the best opportunities by waiting too long.
Instead, I’m trying to follow Warren Buffett’s advice. The Berkshire Hathaway CEO says that it’s more important to buy at a good price than the best price.
As a result, I’m looking for opportunities where stocks have fallen enough to make them attractive to me at current prices. What matters to me as an investor is the price that I pay for my share in the business.
If prices fall further in the future – as I expect them to – then I might well increase my ownership of the businesses I own shares in. But today, as long as I think there are shares in a company that I like trading at a reasonable price, I’m happy to invest.