Is it a good time to invest in the US stock market?

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03:27

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At the time of writing this column, the world’s most important stock market index, the Standard and Poor’s 500, has fallen 24.7% since the beginning of the year, and the technology Nasdaq is down 32.4%, a phenomenal collapse. Describes an even bigger drop in big companies like Netflix, Meta and PayPal or more traditional companies like Nike, Boeing and Disney.

In the face of such declineThe question that inevitably arises is whether this is a good time to start buying stocks with global inflation hurting those who save in hard currencies like the dollar and euro.

Blood is known to attract sharks, and when panic spreads in the market, those who get nervous lose. For this reason, today we will try to answer the million dollar question by dividing the answer into three parts, depending on the investment horizon.

In the short run, the stock market is more like a casino than an investment market, moving rationally based on the expectations of its participants regarding the performance of companies and the economy. If you’re looking to make quick and easy money, this is not the column for you.

Although there are tools such as technical analysis to analyze short time horizons and make pinpoint profits based on market trends, the truth is that from here we see this strategy as very risky and instead,We find value in long-term investments in companies that can generate wealth over time.

Those who make big profits in less than a year probably bought their papers cheap and sold them at a much better price, so there are others who have lost a lot of money by selling high and selling low. It is a zero sum game where one trader wins and the other loses.

The fact that those with little experience can’t ignore but feel they can surf every wave is that new traders are forced to contend with old sea wolves who know the murky waters of the market like few others.

Our inexperienced friends also have to compete with computers programmed with algorithms (high frequency trading) designed to anticipate market movements, which largely explains why That 95% or more of traders lose what 5% or less gain. In the short term, the stock market creates a very unequal ecosystem that benefits the few and hurts and hinders the many..

Added to this, the appearance of black swans means that any brief analysis can become obsolete within minutes. Some recent examples? The coronavirus, the war in Ukraine and the rise of inflation around the world.

I’m sorry to disappoint those who wanted to know if it was worth buying and selling today with the possibility of making huge profits in a few weeks or months, but the good news is that I have Stronger arguments for those who have the necessary patience and are willing to wait at least 2 years to reap what they sow, as we will see later.

Those who follow these columns clearly understand how important it is to observe the yield curve to anticipate financial crises.

A typical market yield curve is a graph constructed by placing US bonds based on two variables: 1) the implied interest rate paid by the bond and 2) the maturity of each bond, which can be a year, 3. , 10, etc.

Depending on the curve formed, the graph can indicate whether there is a risk of recession in the short and medium term. Experience shows that it is usually correct to expect economic crises.

Analysis of the graph is very simple: When US Treasuries offer higher 1-year yields (the default rate) to investors than 10-year bonds, then the curve will be inverted. We will see it go from top (left) to bottom (right), when under normal circumstances it should go from bottom to top and increase as maturity and, theoretically, risk increases.

The bottom line is that the inverse curve tells us that There is a high probability of an impending recession in the US.

That’s exactly what has happened since July 12 of this year, when the one-year bond began to outperform its 10-year cousin. Currently, the implicit rate of the former is 4.22% per annum, and the latter is 3.87% per annum.

Yield curve inversion has successfully weathered the last seven financial recessions. So while anything can go wrong, the chances of us having another one in the medium term are really high.

For this reason, even though the bearishness experienced by the market this year has pushed most stocks to attractive prices, It doesn’t seem like a good time to buy yet if you’ll need the investment in less than two years. On average, the US market returns to an upward path several months before the end of a recession.

The historical average return of the Standard and Poor’s 500 since its inception in 1926 is 10.25% per year. Average returns mean that some years it may decline and other years it may rise, but it usually offers long-term gains, and declines are often followed by stronger average and long-term gains.

It’s impossible to say that those who invest long-term in an index or its underlying basket of stocks will profit from now on, but history tells us that it’s most likely, especially if you start taking a position. During a market downturn, where companies with very good forecasts are offered at tempting prices.

That said, let’s not forget that we’re talking about stocks. Therefore, the rise and fall of prices can cause unbearable vertigo in many investors who are vulnerable to analyzing their investments and are afraid of losing everything or are ambitious to the point of exhaustion.

To understand the short- and medium-term negative potential, we must remember That the last three times the yield curve has inverted (2000, 2008, and 2019), Standard and Poor’s has fallen 51%, 58%, and 35%, respectively, giving an average decline of 48%.

Given the current percentage drop, we’d say there’s some chance we could see another 20% drop before the US market turns around.

For long-term investors, this hasty calculation does not mean that they continue to watch the market with all their capital from the outside. Those who are only going to buy shares at a minimum value never end up betting, so the advice they usually give is to start slowly buying papers that look really attractive at the value of the companies that issued those shares..

If you are interested in becoming a long-term investor, this post will give you some tips that you may find useful.

I have made a number of arguments to support my opinions and expectations, but the truth is that they are mine, not the reader’s, whose level of risk aversion and life plans I do not know.

Therefore, everyone should accept the arguments that they consider valid and serve to develop their own financial map and implement investment strategies.

What I recommend to everyone is great caution, patience and discipline to navigate the complex global economic scenarios we have to navigate. Without them we can hardly weather the storms that have passed and those that are to come.

See you next week with more personal finance tips!