The ASX stock market traditionally performs well for investors over the long term.
More recently, the S&P/ASX 300 Index (ASX: XKO) has jumped a healthy 15% since the end of October 2023. In this article, I'll give my 2 cents on the investment landscape.
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What caused the recent rally?
Asset prices around the world, including Australia, have rallied on expectations that inflation has peaked and is coming down. Therefore, some investors have been thinking interest rate cuts are around the corner.
Interest rates matter to valuations because they change the 'risk-free' rate and increase the discount rate investors are meant to value shares with.
In other words, higher rates mean 'safe' assets like savings accounts and bonds can generate stronger returns, reducing the attractiveness of risk assets like shares – that's why shares fell heavily in both 2022 and 2023.
Have investors gotten ahead of themselves?
Markets are usually forward-thinking, meaning investors typically consider what may happen in the next six or 12 months.
However, the market can become overly optimistic about assumptions, so it can be worthwhile being cautious the higher it goes over a short amount of time.
Last week, we heard about the March US inflation figures, which showed the consumer price index rose 3.5% year over year. This was higher than expectations of 3.4%. The actual monthly number showed a 0.4% rise for the month of March, which would be an even faster increase if we annualised that figure.
Higher-than-expected inflation is likely to mean the US Federal Reserve has to wait longer to implement any rate cuts.
I'm certainly not expecting an October 2023-sized decline due to inflation fears. But I don't expect rate cuts to happen in the next six months, so I'm being even more picky about the stocks I consider buying (or writing about) at these high prices.
Unpredictable events
In my opinion, it's also worth remembering that an unforeseen event can cause the ASX stock market to decline.
No one could have accurately predicted that a deadly pandemic would have affected the entire world in 2020.
The Russian invasion of Ukraine wasn't a highly likely event in most people's books either.
Every black swan event is unexpected, but something happens every so often to cause volatility and put uncertainty in people's minds. We can't say what the next thing will be – perhaps another major development in the Middle East? – but investors should expect the occasional pullback of share prices.
I like to view these events as an opportunity to invest in quality shares at better value.
If there is a sizeable drop in the next few days or weeks, I'll want to jump on those ASX shares.
Long-term investing
Keep in mind that over the ultra-long term, the share market has continued to rise despite the bumps along the way. It has suffered through world wars, smaller wars, two global pandemics, various politicians (good and bad), and more.
There's no absolute guarantee the ASX stock market will lift this year or even this decade. But if a company's underlying earnings keep rising over time, that's a great chance to send the share price higher. Just look at how the Vanguard MSCI Index International Shares ETF (ASX: VGS) has managed to keep rising, powered by its underlying company holdings.
Even when share prices are high, there are still opportunities, in my opinion, which is what we're about at the Motley Fool. Two of my most recent investments have been Sonic Healthcare Ltd (ASX: SHL) shares and Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) shares, which I've covered recently.
