The latest UK inflation data doesn’t exactly paint a rosy picture, but there are signs of a stock market rally being just over the horizon.
According to the Bank of England, inflation is expected to hit 13% before the end of the year. That’s obviously bad news for consumers. However, it’s worth pointing out that the BoE has a terrible track record of accurately predicting inflation levels. And I think there’s a good chance it’ll be wrong again. After all, we’re already seeing the price of oil, along with other commodities, beginning to reverse the recent surge.
While the short-term performance of the stock market looks bleak, the long-term picture remains intact. With that in mind, here’s how I’m planning to leverage my Stocks and Shares ISA to grow my wealth in 2022 and beyond.
The long-term stock market rally
No one really knows when the stock market will decide to stop having a tantrum. And it’s possible that the volatility we’re currently enduring will continue for quite some time. After all, high inflation paired with rising interest rates doesn’t exactly create a brilliant consumer spending environment. And that, in turn, means businesses will likely struggle to deliver growth, let alone maintain current levels of profitability.
But as unpleasant as the situation is, it’s important to remember that these are ultimately short-term problems. A stock market rally has always followed a crash or correction in the past. And while history is often a poor indicator of future performance, having a perfect track record of recovery makes me optimistic.
That’s why when I see fantastic companies being sold off by panicking investors, including the ones already in my portfolio, I can’t help but get excited. It’s never fun watching my positions drop by double-digits. But this is precisely why I like to keep a bit of cash on the side to capitalise on these rare-but-incredible buying opportunities.
Finding the top UK shares to buy in my ISA
As bountiful as the buying opportunities may seem, not every business will enjoy the tailwinds of the next stock market rally. Some of the sharp declines seen these past few months are not without merit. And plenty of companies are wrestling to stay afloat across almost all industries.
Firms with little pricing power are struggling to maintain sales volumes in an inflationary environment. And the situation is even more dire for those that desperately loaded up on debt in 2020 to survive the pandemic lockdowns. Why? Because with interest rates on the rise, outstanding variable-rate loans are getting more expensive to service. Subsequently, greater chunks of profit are being gobbled up.
That’s why before putting any more money into a stock, I’m carefully scrutinising the state of its cash flow. Suppose the worst comes to pass and a recession rears its ugly head. In that case, many of the cash-flow-restricted businesses could end up heading towards bankruptcy.
Therefore, I’m only interested in the UK shares with enough liquidity and financial flexibility to weather the looming storm. And once the dust settles and the next stock market rally begins as investor confidence returns, my portfolio will be primed to surge. At least, that’s what I’m hoping.