Stock market correction: is this a rare chance to get richer? Here’s what the charts say

Chalkboard representation of risk versus reward on a pair of scales

The UK stock market isn’t in correctional territory currently, but it has been this year. At 7,550, the FTSE 100 sits far below its peak at 8,047. Moreover, in a five-year period, the index has only seen 3.5% growth.

Britain’s stock market has suffered from a host of negative pressures in recent years. Let’s take a closer look and explore how investors could profit.

Negative pressures

Interest rates

  1. Shift to cash and debt: High interest rates often prompt a shift of capital into cash and debt instruments. These can yield bigger returns in high-interest-rate environments.
  2. Higher borrowing/servicing costs: The uptick in interest rates has led to an increase in borrowing costs for businesses. In turn, this reduces their willingness to invest and raising the burden of servicing debts.

Global shocks

  1. The pandemic: The Covid crisis brought about a big dip in the stock market followed by an unequal recovery.
  2. Ukraine conflict: The ongoing war in Ukraine has added uncertainty and volatility to the global economy, hitting stock markets. Investors remain worried about potential repercussions on economic growth and stability.

Economic underperformance

  1. Weak economic indicators: Recent economic data from around the world isn’t strong. We’re seeing slow growth in China, the US, the EU, and the UK, while inflation remains sticky in the West generally.
  2. High commodity prices: Commodity prices are up versus pre-pandemic levels. This drives inflation and hurts businesses margins. That said, FTSE-listed resource companies have profited.

Lack of momentum

While earnings have remained strong over the past 12 months, investor sentiment towards UK-listed stocks is low. This is somewhat self-fulfilling as investors won’t want to put their money into struggling indexes. Equally, this negativity reflects concerns about the UK’s post-Brexit future.

Here’s how the FTSE 100 and FTSE 250 compare to their peers.

Created at TradingView

Recovery on the cards

As previously mentioned, investors tend to steer clear of underperforming indexes, although it’s worth noting that market momentum can shift quickly, and it doesn’t always affect all sectors equally. Take, for instance, the remarkable rise of Rolls-Royce‘s share price.

Recent analyst insights suggest that the very negative investor sentiment may have reached its peak. It’s possible that we’re on the brink of a more widespread recovery among FTSE 100 stocks in the near future.

Central to this will be falling interest rates. With the returns on cash and debt falling, money will undoubtedly return to shares.

Market-beating returns

Of course, we all want to be in on a bull market. But we can do even better. It’s about finding those stocks that are oversold or undervalued that have even further to rise to meet their potential.

Barclays is among my top picks. It’s an unloved stock but also it’s vastly oversold, I feel. It trades at just 0.42 times book value, making it the cheapest UK bank by some distance.

More broadly, it pays to do research before investing in UK stocks. Investing has been hugely democratised in recent years, with a host of resources and affordable expert advice, including The Motley Fool, that can help us obtain market-beating returns, even in a bull market.

The post Stock market correction: is this a rare chance to get richer? Here’s what the charts say appeared first on The Motley Fool UK.

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James Fox has positions in Barclays Plc. The Motley Fool UK has recommended Barclays Plc. 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.