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The latest UK inflation data doesn’t exactly paint a rosy picture, but there are signs of a stock market rally looming on the horizon.
According to the Bank of England, inflation should reach 13% before the end of the year. This is obviously bad news for consumers. However, it should be pointed out that the BoE has a very poor track record when it comes to accurately predicting inflation levels. And I think there’s a good chance that it’s still wrong. After all, we are already seeing the price of oil, as well as other commodities, beginning to reverse the recent surge.
While the stock market’s short-term performance looks bleak, the long-term picture remains intact. With that in mind, here’s how I plan to leverage my Stocks and Shares ISA to grow my wealth in 2022 and beyond.
The long-term stock market rally
Nobody really knows when the stock market will decide to stop throwing a tantrum. And it is possible that the volatility we are currently experiencing will continue for some time. After all, high inflation coupled with rising interest rates doesn’t exactly create a brilliant consumer spending environment. And that, in turn, means companies will likely struggle to generate growth, let alone maintain current levels of profitability.
But as unpleasant as the situation is, it’s important to remember that these are ultimately short-term issues. A stock market rally has always followed a crash or correction in the past. And while history is often a poor indicator of future performance, having a perfect recovery record makes me optimistic.
That’s why when I see fantastic companies being sold by panicked investors, including those already in my portfolio, I can’t help but get excited. It’s never fun to see my positions drop by double digits. But that’s precisely why I like to keep some cash aside to capitalize on these rare but incredible buying opportunities.
Finding the best UK stocks to buy in my ISA
As abundant as the buying opportunities may seem, not all companies will benefit from the tailwinds of the next stock market rally. Some of the steep declines seen in recent months are not without merit. And many companies are struggling to stay afloat in almost every industry.
Companies with little pricing power struggle to maintain sales volumes in an inflationary environment. And the situation is even more dire for those who went desperately into debt in 2020 to survive the pandemic shutdowns. Why? Because with rising interest rates, outstanding variable rate loans are becoming more and more expensive to repay. Subsequently, larger chunks of profit are swallowed up.
That’s why before investing more money in a stock, I carefully examine its cash flow status. Suppose the worst happens and a recession comes to the fore. In this case, many companies with limited cash flow could end up heading for bankruptcy.
Therefore, I’m only interested in UK equities with enough cash and financial flexibility to weather the looming storm. And once the dust settles and the next stock market rally begins with investor confidence returning, my portfolio will be ready to grow. At least, that’s what I hope.