Is now a good time to invest in the stock market?

It’s the start of a new financial year and I’m wondering what to do with my annual ISA allowance. Should I keep cash, or invest in the stock market?

High inflation and rising interest rates are reasons to think that stock prices will fall. But I see now as a good time to invest in stocks.

What’s next for the stock market?

Since the beginning of the year, the FTSE 100 it is up 1.5% and so on FTSE 250 it is down 2%. But there is reason to think prices will come under increasing pressure this year.

In the UK, interest rates have been rising steadily, creating a headwind for stock prices. And I can understand why many think this will continue this year.

Interest rates have risen while the Bank of England is trying to bring inflation back down to (somewhere near) 2%. Unfortunately, there are a few problems here.

The first thing is that it doesn’t seem to work. The latest reading shows inflation moving higherfrom 10.1% to 10.4%.

Second, the area where prices seem to be consistently high is food. Higher interest rates don’t have much of an impact here – people don’t stop eating because of higher cash returns.

So I think interest rates may rise and that could be a problem for stock prices. Despite this, I also believe that now is a good time to invest in the stock market.

That is important when buying stocks

When I look at how the best investors approach the stock market, they don’t make decisions based on interest rate forecasts. Also, they don’t make predictions about what the stock price will do in the next few months.

For the best investors – like Warren Buffett and Howard Marks – this is not a big deal. The important thing is that buying shares in a company at a price that will return in the future looks good.

Whether or not the stock is sold at an attractive price, it will bring in the money the company will make. Any company can be a bad investment if it is valued too high for future earnings.

So the question for investors like me to consider whether the stock market allows the opportunity to buy shares in businesses that are low compared to the cash they produce. And I am that.

The FTSE 100 currently trades at a price-to-earnings (P/E) ratio of 11, which represents an earnings yield of 9%. And the current P/E ratio of the FTSE 250 is 10.5, which means an earnings yield of 9.5%.

Nothing seems too expensive to me. As a result, I think there are good opportunities for investors right now.

Find stocks to buy

I’m not saying that stock prices won’t go down for the rest of the year. I don’t think it’s possible to know what the stock price will do, so I can’t rule this out.

FTSE 100 and FTSE 250 trading at low P/E ratios do not tell you which stocks to buy. This tells us that there are good investments to be made. But my job as an investor is to find out what it is.