In late 2021, I repeatedly warned of coming storms in global stock markets. As US tech stocks in particular became increasingly expensive, I predicted a market meltdown in 2022. I expected to see steeply falling prices, higher volatility, lower liquidity and wider spreads. It gives me no satisfaction to see my predictions come true. But after predicting a crash, why have I been buying FTSE shares like mad for four weeks?
Inflation is eroding the value of my money
Here in the UK, the Consumer Prices Index (CPI) measure of inflation rocketed to 9.4% in the 12 months to June, up from 9.1% in May. This means that the cost of living is rising at its fastest rate since February 1982 (when I was almost 14 years old, whoa).
Across the Atlantic, US CPI leapt by 9.1% in the 12 months to June, its highest level since November 1981. This cost-of-living crisis has forced central banks worldwide to raise interest rates. The Bank of England base rate stands at 1.25% a year, up from a low of 0.1% last December. Meanwhile, the US Federal Reserve Funds Rate is now 1.5% to 1.75% a year, from a low of 0% to 0.25%.
Though rising interest rates are good news for long-suffering savers, high inflation tends to be ‘sticky’ (as happened in the stagflation era of the 1970s). And red-hot inflation rapidly erodes the value of savings. Thus, if I leave my spare cash in my current account, its future value will be rapidly eaten away by rising consumer prices. So my wife and I have decided to act, rather than awaiting this inevitability.
FTSE shares look cheap to me
As a veteran value investor with 35 years of experience, I’m always on the lookout for cheap and fairly priced assets. After the global financial crisis of 2007-09, we poured our money into US stocks. Their prices had been crushed in that market collapse. And despite recent falls in the S&P 500 index and tech-heavy Nasdaq Composite index, I still see US stocks as largely overpriced.
Conversely, I see deep value hidden away in UK shares. In particular, the blue-chip FTSE 100 index appears attractively priced to me. Indeed, it has gained 3.8% since 14 July, in a sign that other investors may have also been buying at lower prices.
I’m also drawn to quality shares in the mid-cap FTSE 250 index. This includes several ex-Footsie ‘fallen angels’ that my wife recently bought for our family portfolio.
We’re buying dividend dynamos
In our recent buying spree of FTSE 350 shares, our focus has been on ‘cheap’ shares. That means those trading on low multiples of earnings. But our chief goal has been to buy shares in solid businesses that pay hefty cash dividends to patient shareholders. So far, we’ve bought nine different FTSE 350 shares with market-beating dividend yields as high as 13.5% a year.
In summary, I’m worried about the soaring cost of living (especially surging prices for oil, gas, and electricity), the war in Ukraine, slowing economic growth, and the risk of global recession. That said, by buying shares with high dividend yields, I hope to offset both high inflation and falling share prices!