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Is it time for investors to be greedy or fearful?

by LLB Reporter
1st Jun 22 11:21 am

Markets are fearful, but not in panic mode as a falling pound has cushioned UK investors from market falls.

AJ Bell reports that tech stocks have sold off, but valuations still look elevated while the CAPE ratio has moderated but is still high by historical standards.

Laith Khalaf, head of investment analysis, AJ Bell: “After a torrid spring, markets have witnessed a bit of a comeback in the last few weeks, but some indicators suggest that the market wobble might not be over. Clearly the lifting of COVID restrictions in China is a major boost for the global economy, but the world is still beset by energy and food price inflation, which is going to restrain consumer spending on non-essential items, and could cause further geopolitical unrest, beyond the crisis unfolding in Ukraine. At the same time central banks are raising interest rates, which is leading to a tectonic repricing of risk. As a result, the US stock market in particular has fallen considerably this year, and yet by some measures, it still looks expensive.

“Calling the direction of the market isn’t a particularly fruitful way to invest, unless you happen to own an uncharacteristically reliable crystal ball. In such times of heightened uncertainty, a regular investment plan comes into its own, because by drip feeding money into the market gradually, you smooth out the ups and downs, and if the market dips, your fresh investment buys in at lower prices. Right now though investors might well be wondering whether it’s time to be fearful, or greedy.”

How fearful are others?

“Warren Buffett tells us it is wise to be fearful when others are greedy, and greedy when others are fearful. So how fearful is the market right now? If you look at the VIX index, often referred to as ‘Wall Street’s fear gauge’, the answer is a bit fearful, but certainly not as panicky as the spikes in the index we saw at the onset of the pandemic and during the financial crisis.

“The index currently sits at 26, which is above the long-run average reading of 20, but significantly below the readings of over 50 we saw in 2008 and 2020. So market anxiety is elevated, but it is certainly not at fever pitch, which suggests this is not a moment of extreme fear which should prompt investors to be excessively greedy.”

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