Will be stock market make you rich this year? Nobody knows for sure, but a number of key indicators could give you a fairly good idea.
Interest rates, wages, inflation and the value of the pound will all affect UK markets this year, but online platform AJ Bell has produced five lesser-known signals that may also indicate whether share prices will continue to drive forwards, or come to an abrupt halt.
All five look encouraging right now, says investment director Russell Mould. "None of them is flashing danger, if anything all are flashing green for go."
If nothing is being shipped, nothing is being sold. The good news here is that both the FTSE All-Share Industrial Transportation and America's Dow Jones Transports indices are currently powering higher, offering a 'green' light to global stocks. The rising oil price is maybe another positive indicator.
Copper has a wide range of industrial uses which makes it a great barometer for global economic health. The price hit a six-year low of around $4,470 per metric ton during the January 2016 China sell-off, but has surged back to $7,087, according to Comex. If Dr Copper remains in sound health, markets should continue to show their mettle.
When investors are feeling bullish, they are more willing to take a chance on smaller companies. Market minnows tend to fly in the good times and fall faster during the bad. Blue-chip indices such as the FTSE 100 and Dow Jones Industrial are currently grabbing all the headlines, but AJ Bell reports that both the UK's FTSE Small Cap and America's Russell 2000 are also making solid progress. If this continues, expect more good news. Keep your eyes peeled.
Volatility can be the investor's friend, as it gives you the chance to buy shares at a discount and sell them at a premium. However, history shows that share prices do best when making modest, steady gains, rather than swinging up and down. Last year was relatively smooth sailing on the FTSE 100, which posted the lowest level of volatility since 2005, with just 17 open-to-close movements of more than 1% throughout the whole year. As Mould points out, this does not suggest we are in the midst of a frenzied bubble that is simply itching to burst.
Company management teams are reluctant to cut shareholder payouts, as this dents investor confidence and hammers the share price. Investors should therefore keep alert for signs of dividend stress but currently the outlook seems healthy, with the FTSE All-Share yielding 3.6%, against just 1.31% on a 10-year gilt, a premium of 230 basis points. The index has only topped 200 bps twice in the last decade, and on both occasions it promptly made healthy gains. The FTSE 100 has an even higher yield.
Naturally, a black swan event could smash all these indicators to pieces. However, these market signals may help you look beyond the current doom-mongering about an impending market crash.
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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.