Table of Contents
The steadily declining price of assets during the course of 2022 has driven away a large number of investors from the markets. The crowds that formed when prices were surging pulled money out from the markets as values tumbled. Is now a good time to invest in stocks?
For many, this disheartening scene serves as a window of opportunity but the question is – is now a good time to invest?
The right time to invest is a question of probability and psychology. Fewer people have stuck around in 2022 as markets fell. There must be good reasons to believe that all the financial markets will recover and shoot higher at some point.
On the contrary, volatility still dominates, limiting, and with economic data softening, there may be lower prices for stocks and other assets ahead.
In simple terms, yes, now is a good time to invest. Historically, the stock markets always bounced back. The crypto market has also slowly improved over time. Eventually inflation is likely to push asset values higher, but investors have to take a long-term view of the markets.
Let’s look at what is going on now in the markets, is now a good time to invest? And keep the current market moves in perspective.
Stock Market Sell-offs
The U.S. stock market is going through a stormy 2022. All three major indexes have at times fallen into a bear market, losing more than 20% since their historic peaks. The Dow Jones hit a bottom following a 21% drop, the S&P 500 fell 25%, and the Nasdaq experienced a 34% year-to-date decline.
With an unprecedented level of participation of new investors during the Covid pandemic, this downturn in the stock market is far more intense than previous sell offs.
Many investors are undergoing a tough time in the stock market, and these investors include people like Warren Buffett. The Wall St. legend has lost a lot in 2022, as reported by Investor’s Business Daily. Twelve stocks in his investment portfolio suffered severe losses in 2022.
The stock market is bleeding red, and many stocks are under huge selling pressure. This phenomenon shows the problem of liquidity exhaustion in many businesses. When the stock value declines this effect becomes apparent, and there is not enough cash to compensate for the selling pressure.
In short, while current market levels may offer investors an opportunity for a long-term purchase, there may be lower values ahead.
The Crypto Market: A State Of Constant Turmoil
Two major collapses within 6 months – the de-pegged UST/LUNA crash and scandalous demise of top exchange FTX – punished the crypto market outlook. Under harsh macro conditions, crypto companies struggle to wade through bad news that hits the daily news feed.
The crypto market is undergoing massive upheaval following a huge wave of selling. The price of Bitcoin and altcoins entered a long period of steep decline. With a 70% drop from a total market cap of $2.9 trillion in November 2021, crypto winter is likely to extend at least to the end of 2023.
Government Bonds: Liquidity Crises
US Treasury bonds remain one of the most popular investments, attracting many investors during a time when riskier assets are selling off. That said, the benchmark US 10-year bond has seen losses in 2022.
Complex changes have occurred in the US government bond market in recent years. In 2021, the US bond market saw wild swings as inflation bit into returns.
The expected rise in inflation and economic recovery prompted central banks around the world, including the US Federal Reserve, to reduce the money supply before raising interest rates. Reduced quantitative easing by central banks reduces the flow of cheap money, which will have a negative impact on the stock market.
In November 2022, $16 billion was poured into US corporate bond funds, indicating that softening inflation helped improve market sentiment following a severe sell-off in the majority of the market.
The sharp increase in capital inflows in November 2022, on the other hand, is incomparable to the wave of capital outflows from risky US corporate bond funds since the beginning of January 2022.
So far this year, nearly $52 billion has been withdrawn from high-yield bond funds. When capital flows into the bond market are considered, the total withdrawal from the bond market to date is approximately $44 billion.
With the economy looking soft for 2023, this may be a good time to consider medium-term bond positions. Over the longer-term, inflation remains a concern for any fixed-income investments.
Gold Slows Down
Gold is struggling to maintain its recent multi-year highs. The prospects for gains for more gains over the next 12 months seem weak. According to a World Bank report, the commodity will fall another 4% in 2023.
Demand for gold will be reduced as many countries’ currencies tighten in the midst of an economic downturn, as well as the high cost of living. Higher interest rates reduce the allure of gold, which has traditionally been used as an inflation hedge.
For long-term investors, there isn’t a bad time to buy gold. While the yellow metal may see a flat market in 2023, over the next decade, higher prices are extremely likely.
Bleak Macroeconomic Outlook
Businesses are confronted with a plethora of challenges as a result of the pervasive nature of inflation, which affects every aspect of their supply chains, including gasoline, transportation, logistics, and primary foods, as well as labor.
Inflation rates around the world are high, geopolitical tensions continue unabated, the price of energy continues to rise, and logistics and supply chains are in disarray.
The most urgent problem we face right now is pervasive pessimism. There is also the possibility of a credit crisis and a decrease in liquidity. The majority of investors and businesses view the future with a bleak outlook due to the fact that central banks all over the world are tightening credit conditions in an effort to curb inflation.
Consumer spending will suffer as a direct result of stressed exchange rates. A drop in consumer spending indicates a decrease in demand, and when demand drops, we can expect to see businesses reduce their spending.
In the United States, we have witnessed large corporations cutting jobs in a big way. As both supply chains and the outlook for the economy continue to show signs of weakness in the coming months, it is likely that this trend will continue.
What Did We Learn From History?
The inflation peak came in the USA in the 1980s, credit tightening and high-interest rates arose in 2009, the Dot-com bubble in 2000, the housing credit bubble during the 2007-2008 financial crisis – were all buying opportunities.
If investors choose good companies, and avoided the frothy market peaks, there were great deals to be had.
Good times and bad times are parts of any market. For investors that buy stocks based on time, for example, buying the S&P 500 every month, the next year or two will likely be rewarding. People who want to trade, on the other hand, may not have much luck in these markets.
Just because stocks or cryptos are on sale, it doesn’t mean that now is the good time to punch the gas and load the boat. Perhaps we will catch the bottom soon, but as the LUNA disaster demonstrates, not all the projects that exist today will be around in a year.
Be careful with cryptos.
So, Is Now A Good Time To Invest?
As of December 2022, some stocks and cryptos may offer good returns over the course of the next few years, but given the poor economic outlook, and the prospect of more central bank tightening, it is unlikely the bottom is in.
Now might be a good time to invest if your situation allows you to take advantage of this opportunity, but it is important to be realistic about the potential for lower prices, and watching the value of your holdings go down on a mark-to-market basis in 2023.
As Shelby Cullom Davis once said,
“You make most of your money in a bear market, you just don’t realize it at the time.”
Putting All Together
Inflation has risen sharply across the globe, and as a result, the FED will likely continue to raise interest rates. If you are comfortable watching your portfolio decline in value over the next year or two, this is a good time to buy regular amounts of the major indices via ETFs, as they will likely have value when markets recover.
As the tech sector has shown us, the risk of major declines in popular stocks is very real. Anyone who wants to avoid long term losses should be careful about buying individual stocks over the next year or two. Stay safe, and buy the broad markets.
Assets outside of equities should be viewed with caution. Bonds, like gold and cryptos, may get caught up in short term market currents that run contrary to longer-term trends. While bonds are seen as a safe asset, the longer-term outlook for debt is anything but safe. Gold may not see much action in 2023, but over the coming decade, gold looks like a good place to be.
It is highly unlikely that inflation has run its course, even though it may ebb in the coming year. Invest accordingly.