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When is it the right time to invest in the stock market?

This is of course a timeless question and nobody, not even we at Charlwood Leigh, have a definitive answer. However, we are experienced enough to realise that we are currently in an environment where all the economic indicators suggest that now is an EXCELLENT time to take money out of the banks and building societies, where interest rates are historically very low and place it into the market, where prices are at their lowest point for seven years.

Interest rates are at their lowest point for over forty years with every sign that they could still go down further. When compared to rates in America at 1.25% and Europe at 2.50% UK base rate of 3.75% appears to be high. There is no better way of stimulating an economy than reducing interest rates and our current rate has the capacity for this to happen without any undue knock on effect in other areas. A major fear of interest rate reductions was fuelling the housing boom. However, the housing boom seems to have levelled with some pockets in the UK actually seeing prices go down. The fears over oil prices and the effect that price increases or a worldwide shortage would have upon businesses have now subsided since the end of hostilities in Iraq. Indeed a reduction in oil prices seems likely which, when combined with the end of house price rises, should have the effect of reducing inflation. Another indicator that there is potential for interest rates to go down.

Interest rate rises are a typical tool used to combat rising inflation, but as inflation is also very low and appears to be stable the need to raise interest rates for this purpose would appear unlikely.

The FTSE 100 is the index of the share prices of the 100 largest companies (by market capitalisation) in the UK. When using this index as a gauge share prices are at the same levels as they were seven years ago. City analysts seem to agree that the market has bottomed and that a steady growth between now and the end of the year is a likely scenario.

So where is all this leading?

Quite simply, it would appear that we are in that part of the economic cycle that suggests that money, other than your emergency reserve, held on deposit should now be being placed into the market.

What is the Economic Cycle?

The economic cycle (or the business cycle) is a term economists use to describe the cyclical flow of economic growth and decline. Due to the freedom of economic choice found within a free market economy. Businesses and consumers often react to the economic environment in ways that would most benefit them, but with little consideration to the economy at large. Thus, we observe the aggregate effect of hundreds of thousands of people all pursuing similar goals, for similar reasons, at similar times. The final effect of this behavior is an economic cycle that tends to swing up and down as people act, and react, to the economic environment in unison. The economic cycle will thus move repeatedly through periods of economic recovery, expansion, decline, and recession.

The following diagram illustrates this and the red dot shows approximately where we believe we are in the cycle right now.

In the late 1990's we saw the expansion of the stock market led by the boom in technology companies and investors being caught in the rush to buy these and other stocks. Then followed a decline in the market during 2000/01, again led by technology based companies as expected profit levels did not materialize and many companies went bust all together. This led to the painful recessionary period in 2001/02 and the early part of this year when all stocks, whatever sector, suffered and business profits were negative.

The recessionary period was prolonged not only by events on September 11th 2001 and the lead up to the war in Iraq but also because the seasoned private investors who had become share owners during the 90's boom had had their fingers badly burnt. The lack of investor confidence is still holding the market back, despite predominantly positive economic data. With the war behind us, the oil situation more certain, there now seems to be a slow but general improvement in consumer confidence and we appear to entering the recovery period.

Next: Find out how to invest in the stock market during the economic cycle.