It was a rather poor start to the day for those that follow economic data closely. GDP data for Q4 2023 fell by 0.3%. When I add this to the fall in Q3 of 0.1%, it technically puts the UK in a recession right now. The FTSE 100 is flat today, but should economic activity continue to weaken then I think it could impact some stocks. Here’s my plan for buying cheap shares.
Buying now
The stock market is a leading indicator. This means that it already reflects the current state of the economy and actually trades based on people’s thoughts of the future.
This contrasts to the GDP data, which is a lagging indicator. We found out how the economy performed last quarter, not how it’s performing right now.
So to a certain extent, the price of different stocks right now should reflect the recession. For some, it was anticipated anyway. This means that for shares that are cheap at the moment, I can purchase them with the recession discount already applied.
Saving some cash for later
Even with my above thinking, it doesn’t make sense to pile in to cheap stocks with all my money. The outlook for the economy isn’t great. Inflation isn’t falling at the same pace that it has been, which could push back any potential interest rate cuts.
This could mean that the recession lasts for longer, with stocks underperforming in the coming months. Due to that, any stock that I purchase now could fall further.
To try and solve for this problem, I’ll save some money which will enable me to buy stocks in the future. In theory, if I buy a stock at 100p now and it falls to 80p in a few months and I buy more, my average buying price is reduced from 100p to 90p.
An example
A stock that I feel is cheap at the moment is Glencore (LSE:GLEN). The stock is down 24% over the past year, with it recently touching 52-week lows.
The stock looks attractive to me now for a couple of reasons. One is the dividend yield, which currently stands at 9.07%. Despite the fall in production output in the last year, the firm is still committed to the dividend policy, so I don’t see the dividend per share drastically dropping.
The other angle is that the price-to-earnings ratio is at 3.51. Given that I flag up anything below 10 as starting to look undervalued, 3.51 is very low.
Of course, should tensions in the Middle East and in Eastern Europe ease this year, the oil price could fall. This would be a negative for the company.
Yet if this factor (and the recession) weigh the share price down further, that’s when I can make use of my dry powder and average my buying price down over coming months. As a result, it’s a stock that I’m thinking about buying shortly.
