The bright sunshine and leisurely weekends of Summertime can make life seem more straightforward than than at other times of year. It is, as the song says, “when the living is easy”. But once the long balmy days end, will a brewing economic storm break out? If so, could it reverse the stock market recovery that has seen the FTSE 100 gain over 40% in value since the dog days of March 2020?
The index is up 4% over the past 12 months and there are growing signs of problems looming in the economy both in the UK and globally. From high inflation to an expected UK recession before Christmas, I think the Autumn could bring more bad news.
That could be bad for investor sentiment. Shares have roared back from their pandemic lows. But in reality, I think many businesses now merit lower — not higher — valuations than several years ago. Cost inflation has eaten into profit margins and the demand outlook is worsening. If that translates into worsening profits at many companies, I expect their share prices may drop.
Ways to handle a falling stock market
But is it a bad thing for me as an investor if share prices drop?
That depends what I want to do. If I sell my shares at a lower price and lose money, it is costly. It may also be that a worsening environment permanently reduces the value of some businesses in which I have invested.
However, if I have been buying shares in companies with a strong investment case that has not changed, a shift in the paper value of my shareholding does not matter to me. I will just keep those shares.
As a believer in long-term investing, I would then wait in the hope that over time my reasons for optimism about the shares turn out to be right.
A stalled market recovery could help me
With the FTSE 100 in positive territory over the past year, do I want the stock market recovery to continue?
Actually it does not bother me if it comes to a screeching halt. That is because I am not a trader trying to exploit share price movements. Instead, I am a long-term investor looking to buy shares in great businesses. A falling stock market might give me the chance to buy such shares at a cheaper price than before.
So, for the same size of investment, I could build a bigger stake in what I think are promising companies.
That is why I have a watchlist of companies I like such as Halma and Spirax-Sarco but whose share prices seem expensive to me. Making that list now means that, if the stock market recovery falters and prices suddenly tumble, I will be able to seize the window of opportunity.