When Will The Stock Market Recover? Everyone Wants To Know

In 2022, most global stock markets had a rough time. In fact, as of late November 2022, the S&P 500 had one of the worst years in its history. Most people are wondering: when will the stock market recover?

There is no simple answer, but we can say that in time, most of the major global stock markets are likely to move higher from current levels. In fact, there may be a huge rally coming, as similar economic conditions in the 1980s created low, then high, stock prices.

If you are looking for trading advice, you came to the wrong place. We can offer insight into why stock markets backed off from all-time highs and what will likely signal when the stock market will recover.

So…when will the stock market recover? What is the stock market forecast for next 3 months?

Let’s take a look at what needs to happen before global equities make a comeback…

High Flying Stocks Fall to Earth

It’s important to remember that in 2021, global equity markets were at all-time high valuations. The S&P 500 traded above 4800, which was a far cry from the panic bottom of 666 it logged in 2008. Equities had an amazing decade or more, even if there was some volatility along the way.

At the time of writing, the S&P 500 is trading above 4000, which is still a high valuation by historical standards. Of course, anyone who bought markets at all-time highs in 2021 faces some mark-to-market losses, which never feels good. When Will the stock market recover? Maybe in 2023? What is the Stock market prediction for next 5 years? These are hard questions to answer.

Why Did The Stock Market Sell-Off?

In 2009, global central banks started down a new path. It’s called Quantitative Easing (QE), but many think it creates money out of thin air. The truth is nuanced, but the short story is that QE was great for financialized asset values.

In the wake of the crisis of 2008 and the introduction of QE, almost every financial asset appreciated in value. Stocks, bonds, real estate, art, and many other markets gained in value as central banks created money and put it into the financial system at the institutional level.

Anyone who bought stocks back in 2008 and 2009 knows how good it feels to see your portfolio double or more. Now, with a very different approach coming from central banks, most of the assets listed above are falling in value.

There is a simple reason why.

The Interest Rate Question

The US Central Bank, AKA The Federal Reserve, or the FED, is raising interest rates at the most aggressive pace in recent history. By raising interest rates, the FED makes the cost to carry debt more expensive and discourages the use of debt.

The last time anything similar happened was in the early 1980s. When will the stock market recover and Interest Rates get back to 2%? We don’t know.

At the time, then-FED Chief Paul Volcker ramped interest rates into the double digits and caused a severe global recession. It was ugly. Volcker decided to raise rates to the level he did for one simple reason – inflation. He had to save the US dollar’s value, and Volcker was successful.

Today, the FED is following the same path, as inflation is at a very high level in both the USA and globally. Just like in the late 1970s and early 1980s, the dollar is rising in value, and there are many other economic consequences. Lower stock prices are one such consequence.

A Slowing Real Economy

The COVID-19 pandemic severely restricted global economic activity. Although many countries are open again, the results of the lockdowns are still being felt. Combined with aggressive central bank tightening, the global economy is limping along – at best.

When FedEx (NYSE:FDX) warned of a slowing global economy in September of 2022, its shares fell by more than 15%. While the shares recovered from the lows that were hit in the wake of the announcement, they have yet to reclaim the levels they were trading at in August of 2022.

In fact, FedEx stock has fallen by nearly $100 from the all-time highs it hit in 2021, which is more or less the case for most major companies trading in US markets. The technology sector has been hit especially hard. Some of the most popular tech stocks from the last bull market, like Meta (NASDAQ:META) and Netflix (NASDAQ:NFLX), face serious selling pressure.

Inflation is Still Hot

Despite a string of powerful rate increases from central banks across the planet, inflation is still high by recent standards. Until inflation drops to levels that align with central bank mandates, rate rises will likely continue.

Prior to 2021, the US Consumer Price Index (CPI) was below 3% per year. While the CPI isn’t a complete measure of inflation, it does give a sense of the inflation consumers are familiar with. In 2021 the CPI was nearly 5%, and in 2022 the CPI is likely to be higher than 7%. The FED has a dual mandate, and one aspect of the mandate is to keep inflation low.

Stock markets can move up in inflationary environments, but they are less likely to when central banks remove liquidity from the overall economy. Currently, the FED and other central banks are targeting inflation with higher interest rates, which is a major headwind for global stock markets.

What Will Make The Markets Turn Back Up? When Will the Stock Market Recover?

Any market thrives on liquidity – the stock market included. 

In almost every case, more liquidity entering a market means higher prices, especially if that liquidity is matched with an overall increase in the money supply. The flood of money created by central banks after the crisis of 2008 drove stock prices higher, and for stock markets to move up again, money will have to be lured out of cash positions and into riskier assets like stocks.

Coming back to the Volcker years at the fed, looking at a chart of the S&P 500, we see that while the index did sell off initially as the FED ramped rates higher (actually starting before Volcker took over), as the pace of rate increases slowed, the value of the S&P 500 exploded, and rallied hard into the crash of 1987.

Could this same market dynamic play out again?

Only time will tell.

While central bank policy matters, the real economy isn’t in great shape. Part of the reason why tech stocks have been hit so hard because advertising revenue is slowing, and political issues are impacting both supply chains and production.

A recent incident at Foxconn plant in Zhengzhou, China, could remove 30% of the global iPhone shipments for the month of November 2022. If more events like this happen, the impact on Apple profits would be meaningful.

In order for stock markets to recover, there will need to be more stability in the real economy. 

Companies can’t make money if operations are antagonized regularly or vital materials are in short supply. Clearly, the global marketplace is complex, but let’s look at a few things that may precede the next bull run in stocks.

The FED Matters

It would be difficult to imagine a scenario where the FED keeps aggressively raising rates, and stocks begin the next bull market. The FED has the mandate to maintain inflation at a given level, but it can opt to raise or lower the inflation target as it sees fit.

Given the near impossibility of bringing inflation down to its current 2% inflation target with rate rises and withdrawing liquidity from markets with other means, look for the FED to raise its inflation target. For example, if the FED decided to raise its inflation target to 4%, or even higher, and slow the pace of rate increases, the market sentiment would likely change for the better.

The downside to this kind of policy shift would likely be inflationary (negative for the US Dollar’s value). However, that isn’t necessarily bad for stocks. One thing that may enter the stock market under this scenario is volatility, as traders and investors try to figure out the long-term consequence of a structurally weaker US Dollar.

Regardless of the US Dollar’s direction, if we see the FED shift the level of its inflation target, look for brighter days ahead in the equity markets.

A Stable Real Economy is Key

The disruptions evolving from COVID-19 have not run their course. 

In order for companies to thrive and for monetary conditions to ease, the real economy must stabilize. Global supply chains are in the process of being reorganized, and the China-led manufacturing economy that existed prior to COVID-19 is likely never coming back. 

While news out of East Asia is still driving day-to-day stock prices, the companies like Foxconn and TSMC are looking outside of East Asia for more stable locations. As these tectonic movements happen, there will be buying opportunities for investors who are willing to hold shares for the long term. 

Unlike the rebound in 2009-2020, the next stock bull market will likely need to build a multi-year base, and the gains won’t be as drastic as they were in 2008-2009 or 2020 when central banks dumped easy money into the financial economy. 

Keep an eye on the fundamentals, and you will see when will the stock market recover.

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