Yesterday, the FTSE 100 fell considerably and almost touched 7,000 points. Even with a slight bounce this morning, it’s been a tough week for the index. However, whenever the FTSE 100 has dropped close to 7,000 points this year, the dip has always been bought. So here’s why I think this could be another occasion to dip in and buy some solid stocks.
Inflation concerns already priced in
One of the reasons for the fall earlier in the week was the bumper US inflation print of 9.1%. As the stock markets are correlated to some extent, the fall in the US meant that UK markets also fell. Yet I think the concerns around high inflation are now pretty much factored in to the price of the FTSE 100 and other markets.
The shock factor of higher numbers is dissipating somewhat. It’s not like we’re in the situation at the start of the year when the realisation was starting to emerge that inflation could start to ramp up. Investors are aware of what this means for interest rates, company financials and the broader economy. So I’m not overly concerned that high inflation could cause a large drop in the market from here.
Recession not guaranteed
For all the chat of an imminent recession, the UK economy is showing signs of holding up. For example, UK GDP rose by 0.5% in May, beating expectations comfortably. With unemployment also at 3.8%, a tight labour market is supportive of a strong economy, not a weak one.
I do admit that there are other indicators that point to the economy slowing down, but we don’t want to talk ourselves into a downturn. On the basis that the data continues to remain firm, I’d expect the stock market to pick up momentum and move back towards the highs of the year.
FTSE 100 dividend payers look attractive
When the stock market dips, dividend stocks look more appealing to me. The calculation of the dividend yield is made up of the share price and the dividend per share. So if the dividend per share stays the same but the share price falls, the overall yield rises.
So on this dip, the FTSE 100 average dividend yield has risen. In fact, it has just broken above 4%. This means that I can make my money work hard and benefit from income much higher than high-interest deposit accounts.
Obviously, dividend income isn’t guaranteed. But when I see yields on established household names above 7%, I think the risk/reward stacks up.
Elsewhere, I feel the main concern at the moment is the start of earnings season. Over the coming month, most FTSE 100 companies will report Q2 and H1 earnings. This could go either way but, due to the uncertainty of the outcomes, I would label it as a risk.
Despite this, I think that the fall this week towards 7,000 points represents another opportunity for me to buy the dip, and pick up dividend stocks and other undervalued options for the long term!