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How I’m preparing for a stock market recovery

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The markets have been incredibly volatile over the past couple of years. While the pandemic has been one factor in these movements, the war in Ukraine and broader economic issues have also played roles. 

Nevertheless, there appears to be a stock market recovery in progress, demonstrated by rising share prices and improving financial results. Let’s take a closer look to see how I’m preparing.

How things have been going

Many industries were hit during the pandemic, but the travel and retail sectors were pummelled in particular. 

This prompted me to buy shares of IAG and Rolls-Royce. My main thinking behind these investments was that air travel had ground to a halt, but that restrictions would ease at some point and passengers would return. 

While this was generally correct, it’s probably taken longer to materialise than I thought. In the meantime, the share prices of both companies have continued to slide.

To these I added Cineworld, the cinema firm that slumped to a $3bn pre-tax loss in 2020. This was because revenue basically dried up when cinemas were forced to close.

I wrote on these three companies at the beginning of July. By comparison, I can see now that the market is starting to factor in the relaxation of restrictions, because I’m down a lot less. This is shown in the two right-hand columns. 

Stock 1-year performance Performance until 8 July* Performance since purchase
Cineworld -62.41% -66.25% -60.8%
IAG -30.91% -15.44% -9.37%
Rolls-Royce -10.7% -15.7% -10.18%
*since the time of purchase

While I’m still down heavily (especially with Cineworld), I’m not worrying. I’m sticking with my initial investment philosophy, which was to buy beaten-down companies with a view to returning to pre-pandemic norms.

Is there really a recovery?

There seems to be a feeling that the worst is over. But there are still a number of threats, not least the possibility of further pandemic variants as the weather cools this autumn. 

Also, while the US Federal Reserve appears to be pausing the hiking of interest rates, which would be generally good news for the stock market, this is not guaranteed. 

However, recent trading updates for all three companies listed above are becoming more positive. Rolls-Royce’s civil aerospace segment is recovering and Cineworld is welcoming more customers through its doors. IAG even returned to profit for the three months to 30 June.

This all gives me confidence that my fundamental understanding of these companies is accurate. To that end, I’ll continue to add to these positions whenever the share prices dip.

I’ve also been looking for fresh opportunities. In the same article from the start of July, I stated I was adding Alaska-based oil exploration firm Pantheon Resources

Since purchase, the shares are up 25%, but I added this business for its long-term potential and the oil reserves it may hold in its vicinity.

While I’m not totally convinced that a stock market recovery is here, the evidence seems to suggest that it is. I’ll therefore continue adding to my holdings to hopefully prepare for a much-improved market environment.