What Everyone Investing In The Stock Market Ought To Know
The market is highly seasonal. While it is possible to buy stocks at or near the lows of the cycle in terms of technicals, sentiment, and valuations, it is very difficult to make money during any kind of "decent" market cycle. During market declines, market participation tends to come crashing down. For instance, at the market bottom in March 2009, there were 27 consecutive trading sessions where the S&P 500 fell by 1%. In those 27 trading days, the index fell by an average of 1.82%. I'm not even counting all of those days when the index was flat or up for those same 27 days. Those 27 days accounted for 49% of the total S&P 500 decline. Thus, it's not unreasonable to suggest that a strategy of buying stocks at the lows of the market and holding them for six months or a year will likely lead to significantly better returns than simply holding a cash position or dollar cost averaging the entire portfolio at the lows of the market.
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Now let's look at some of the signals investors should consider when trying to determine where the market might be headed.
Inflation: On the Federal Reserve's most recent Federal Open Market Committee meeting, the Fed's preferred measure of inflation was 1.9%. Over the course of this current economic expansion, this is the first time that inflation has been below the 2% level.
Source: Bloomberg
Given that the market is on track for its eighth year of increases in the valuation of the S&P 500, it doesn't appear that inflation will be an issue for several years. I consider the recent pause in inflation as a welcome development for risk assets.
A Few Different Factors Lead Me To The Upside
The combination of:
A slowing in the pace of inflation
A Fed that is buying fewer bonds
A flattening yield curve
A lower 10-year government bond yield
Any combination of these factors, coupled with an expanding stock market, are a recipe for gains.
The upshot here is that if you believe that the current bull market is "decent" or that a top is at hand, then the results here are far more likely to be negative than positive. The gains of 3.6% per year generated by owning stocks when there are 9.8% higher returns available in other asset classes suggests that it is more than likely that the overall return on stocks over a "decent" bull market would be negative.
But I do believe that an expansion lasting "decent" length is likely to occur. Even if the recession were to begin tomorrow, the economic activity of the U.S. and around the world is likely to be sufficient to make up for the loss of 4% GDP. Furthermore, the impact on individual investors would likely be quite muted in the event of a recession. Unlike stocks, bonds are viewed as "put options." Investors know that their capital will be redeemed at par or slightly below par. Thus, when the economy turns south, many of them are reluctant to abandon their bond investments. Additionally, most people do not believe that their income stream will be affected by a protracted recession.
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Summary and Conclusion
The combination of improved economic activity, an attractive valuation, a growing economy, and a flattening yield curve suggest that there is substantial upside potential for the U.S. stock market.
Even though the majority of Wall Street analysts are calling for the U.S. stock market to go up, these analysts appear to be ignoring some important signs that suggest that the bull market is in its late stages.
Many of these analysts seem to ignore the signs that indicate that the economy is slowing and that inflation is too low for the current stock market valuation.
Others seem to be relying on some of the outdated assumptions that were at the heart of the 2008 bear market.
Thus, even if I am wrong, there is still significant upside potential for stocks over the next few years.
Even though the growth rate of the economy is likely to slow in the years ahead, the ratio of debt to GDP will likely remain elevated and will act as a significant headwind to future economic growth.
In addition, the government will likely struggle to "pay" the interest on its ever increasing debt load and may need to reduce the size of the Fed's balance sheet.
The threat of a U.S. recession remains a real concern, but the risks of an economic slowdown are low.
Combining the expected positives with the risks suggests that it is not likely that stocks will give up significant value over the next two to three years.
This is not to suggest that there will not be periods when the stock market dips considerably. However, we are likely to experience even more periods when stocks respond favorably.
Realeted Links :
https://danielhcole.blogerus.com/36649093/is-residential-property-a-good-investment
https://danielhcole.arwebo.com/36710081/identify-your-investment-goals
https://www.slideshare.net/DanielCole80/equity-portfolio-management-techniques-26pdf
https://issuu.com/danielhcole67/docs/investment_analysis_and_portfolio_management_for_m
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