Tips to invest when prices fall

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Chief of the Investigating Officer, Defiance ETFS.

The first half of the year came with the worst stock market drop in half a century. Two years after the Covid-19 virus shook the markets, investors faced a new set of problems, including slowing growth and inflation.

There was and still is a lot of discussion about whether we are in a recession. Major indices were in correction or bear market territory during the past quarter. As Nasdaq, S&P and Dow Jones continue to fall for the most part with only small gains, should investors buy the dips or sell the rips? What will the future bring?

On the one hand, consumer confidence in a all time low. According to a study by the University of Michigan, the market barometer for measuring consumer confidence, the Consumer Sentiment Index, fell to 50 in June 2022, down from 58.4 in May and lower than last June’s 85.5.

We saw random sales across all sectors and asset classes, and for lack of better words, we had nowhere to hide. All asset classes were in the red, with the exception of oil, gas and energy-related transactions. The Energy Select Sector SPDR Fund was up 35.66% in the first half of the year, while West Texas Intermediate was up 74.31% over the same period, according to data collected by my Bloomberg Terminal company.

According to the same database, major indices such as NASDAQ, S&P and Dow fell 30%, 20% and 13% over the same period. The average investor has little confidence that the economy will make a soft landing. We hit the definition of a technical recession with two consecutive negative quarters of GDP. On the other hand, we have continued earnings, a red-hot job market, higher consumer savings and strong debt service ratios – all signs of a healthy economy.

That’s why I think the future looks brighter. It is very possible that we have seen the bottom of the market this summer. This doesn’t mean we can’t retest those lows, as it’s very hard to confirm a bottom until we’re way off and discuss it afterwards.

But I see investors starting to dip their toes back into the market. Earnings showed that many were able to beat estimates and absorb inflation, as evidenced by strong operating margins and earnings per share. Of the 87% of companies in the S&P 500 reporting actual results at the time of writing, 75% reported actual earnings per share above estimates. The tech generals like Microsoft, Google, Amazon and Apple – the names that led the rally of the past decade – came through again; however, the near-term outlook has been bleak and significant risks remain.

But as we see stock prices fall as they did in the first half of the year, investors with long-term prospects may feel comfortable with the idea that the dollar is averaging some of their favorite stocks, which were much more expensive six months ago. As we see technology and liquidity recover in technology-related stocks, I expect a greater rotation from value to growth will come our way, as well as a longer-term recovery along with the broader market, especially after the Federal Reserve signals that there are no more interest rate hikes coming at us.

As growth slows, the US economy is also returning to pre-pandemic levels. Jobs, expenses and revenues were transferred to services, a major contributor to GDP. I think a major recession with broad contraction is less likely as the strong momentum in the labor market continues.

The Fed has raised 75 basis points twice and the market has absorbed it. We may see additional walks; however, inflation is likely to go down from its peak. Once the Fed loses momentum with rate hikes and we get past the summer liquidity slump, I think it’s likely we’ll continue to have strong jobs, great earnings and consumers spending money; maybe we’ll see a better end to the year.

The economy is returning to an area of ​​normalcy and reasonable growth. That brings with it several opportunities to buy your favorite stocks at a reasonable price. While we’ve seen a strong bear market rally in the shorter term, the train certainly hasn’t left the station. However, to take advantage of the future of price appreciation, an investor has to be on that train. According to Investopedia, the S&P’s annualized return is 500 average 10.5% between 1957 and 2021.

Again, while it’s hard to bottom out or pick the exact moment when it’s safe to invest and experience that L-shaped recovery, I think it’s unlikely that investors will go too high, especially if they’re going for the longer term. going to have periods. Investing in a bear or market-in-correction market can be particularly beneficial for younger investors saving for retirement. It’s not often (2020 during the pandemic and 2008 before that) that we get these exaggerated pullbacks that provide interesting entry points. For example, for investors with extra cash that can be locked in for more than a year, it may be a good time to buy stocks, grow at a reasonable price, and hope for price gains as the market and economy recover.

Many of us are greedy when prices rise and scared when they fall. In these times we would take a page from Mr. Should take Buffet and turn the story around. I encourage others to consider the opportunities in a depressed market for future potential earnings.

The information provided here is not investment, tax or financial advice. You should consult a licensed professional for advice on your specific situation.


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