The economic and geopolitical news has been gloomy for months now. And the stock market has been weak.
Day after day, many investors have been watching the value of their share portfolios grind lower. However, falling markets keep sliding until one day, they don’t. And my feeling is that day is close.
The bull follows the bear
Meanwhile, bear markets tend to set up the conditions for the next bull run. And one reason for that is the way better value can emerge from pummelled stocks. A bear phase can scour a lot of speculative froth from company valuations. And that means it may be easier for investors to find attractive stocks offering a margin of safety.
And in the past super-investors such as Benjamin Graham and Warren Buffett have used the concept of a margin of safety to good effect. The idea is to buy stocks when they are assigning a value to underlying businesses below what they are actually worth.
However, I admit it’s not easy to pin down the true worth of any enterprise. And doing so can demand the application of a blend of art, science and arithmetic. Investing is all about looking into the future and playing the balance of probabilities.
But investing from a good-value base is a sound start. And I reckon many companies with beaten-down stock prices have been surprising the market with positive trading updates. For example, we’ve seen recent upbeat statements from companies such as Shoe Zone, Somero Enterprises, Capital, and Quixant, among others.
I reckon good trading bolsters the true worth of a business and adds weight to the idea that the market could be undervalueing many companies right now. But that’s not the only reason I reckon we could be about to see the great stock market recovery of 2022 and beyond.
The stock market looks ahead
Another reason I’m bullish is because many commodity prices have been falling over recent weeks. And expensive raw materials have previously been one of the drivers of cost inflation in the economy. However, commodity prices could be falling because speculators are predicting a further slowdown in the economy.
But is an economic slowdown such a bad thing? If economic activity declines, it could encourage central banks to lower interest rates. And that’s especially true if the rate of inflation begins to fall as I expect it will.
Meanwhile, it’s worth me remembering that the stock market is not the economy. And the markets are known for looking ahead. Therefore, a scenario with falling interest rates could be a booster for many businesses. And their stocks could elevate from the lowly positions they currently occupy.
I think it’s such forces that cause new bull markets to begin when many people least expect them to. When, for example, the news is grim and when everyone seems pessimistic.
It’s possible the markets could become more optimistic as we approach the end of the year and the festive season. Although nothing is certain with stocks and shares. And I could easily prove to be wrong in my assumptions. Nevertheless, I’m investing now and working hard on my watchlist to identify more stock opportunities.
The post Are we about to see the great stock market recovery of 2022? appeared first on The Motley Fool UK.
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Kevin Godbold has positions in Capital Limited, Quixant, Somero Enterprises and Shoe Zone. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.