Massive wealth transfer has begun while various market plummets. So far in 2022, Nasdaq has sunk into a bear market with a long list of stocks trading at their all-time low. We are now seeing a shrinking economy, 40-year high inflation, and a possibility of a recession on the horizon.
But beneath all this jam-packed bad news lies the opportunity to build wealth more than any other recent time. This very moment could be the best time to invest because time such as this is where money gets made.
Current Market Condition
The market is pretty much on a bum right now, dubbed an ‘everything sell-off.’ The recent downhill can be divided into three primary categories, including:
- Inflation. Wages increase with demand skyrocketing, making businesses speed up production and order fulfillment. Prices rose so quickly that we have four-decade high inflation, and the transitory got used as an excuse to put people at ease. Yet, the expected lowering of prices isn’t at all happening.
- Increase in interest rate Inflation alone isn’t enough factor to cause to make everything sell-off. However, it leads to an increase in interest rates which included the 25-basis point rate hike in March, and a 50-basis point rate hike in May. The government plans to continue this hike all throughout the year. This drastic increase in interest rates made stock market valuation less appealing, mortgages cost more to borrow, businesses needed to pay more overhead, and consumers had lesser disposable income to spend.
- Uncertainty. The impacts of the interest rate hike are what bring uncertainty. Thus, there are emerging concerns about companies laying off their employees. For instance, there’s Robinhood, which gave up around 9% of its staff. Rocket Mortgage was also forced to downsize along with the slowing demand.
These three things could continue disrupting various industries. If we combined these with the anticipation of an upcoming recession, the anxiety brought by the Russian-Ukraine war, the unprecedented rate hike, and the expectation of stagflation— we would have the perfect recipe for a market decline.
The Plummeting Stock Market
The stock market saw its worst drop since 2020. The Nasdaq is down by 20%, S&P 500 is down by 17%, and the Dow Jones is down 13% from its peak.
It’s quite easy to think that the stock market already knows that they will be seeing massive hikes along with a recession, yet everything will be just fine. However, according to Data Trek, the odds embedded with S&P 500 nearing zero equal is at 3,525 over 4,000.
According to Morgan Stanley, the S&P 500 could plunge as low as 34.60, turning profit growth into negative amidst today’s recession concerns. They also highlighted that in the previous 10 instances where stocks endured deep losses in the first quarter of the year, 6 have seen the market extend its decline through December, and only 2 saw gains exceeding 10%.
The stock market descent is still pretty much tamed compared to cryptocurrencies.
Cryptocurrency Investors are Underwater
According to a CBNC report, about 40% of cryptocurrency investors are underwater, with crypto prices sinking to more than 55% from their peak.
In 2021, Bitcoin was perceived as a good store of value, a hedge against inflation, and great protection against market stability. But it didn’t live up to others’ expectations. It, in fact, was heading on the same trajectory as tech stocks.
Whenever interest rates increase, most investors make it their goal to have safer and less volatile assets and avoid extremely volatile assets like cryptocurrency.
Fundstrat Global Advisors recommends one-to-three months safeguard on long positions. Yet, El Salvador remains in pursuit of cryptocurrencies, buying $15.5 million worth of Bitcoin to add to its balance sheet.
Based on the stock-to-flow model, we have been trading lower than the target price for more than a year. Hence, investors don’t see this as a safe haven asset quite yet.
Skyrocketing Housing Prices
In this market that we have now, nothing seems to be safe, and the real estate market isn’t an exception. The soaring interest rates drove 30-year mortgages to increase to their highest point since 2009.
Despite all the negatives, buyers are looking into the bright side with the market inventory starting to improve since this potentially means more appealing prices. Sellers started decreasing their asking prices, and over a dozen cities are beginning to see a decrease.
If you would not mind all the Reddit posts about selling everything, moving to cash, and questioning how bad things can get— you could be one of the benefactors of the greatest wealth transfer in the last two years.
What To Do With Massive Declines in Market
Instead of worrying and stressing yourself out about the numbers you can’t control, you’re better off looking at them objectively. This will allow you to perceive realistically what is going to happen.
Historically, bear markets offered a lot of opportunities to people who were willing to grab them. There’s always an outlier in the market, and it doesn’t always follow the average every time. Let us give you an example.
The market fell by 34% in February 2020, then immediately started recovering by August. This is the shortest bear market in history.
But before this happened, the market actually fell to 56% over 17 months throughout the great recession. If you have invested money right at the peak prior to the decline, it would’ve taken you about four years to get even.
The Dot-Com crash also went downhill when technology stocks went down 78% of their value, which took one decade to recover. There happened to be a lot of market declines throughout history, and they happened for their own unique reasons.
The good news is that you don’t have to be afraid of declines and recessions. You have to take advantage of them.
Recessions bring about a 26% decline in peak to trough earnings, suggesting that we could have more room to fall. This makes market descents the perfect opportunity to invest and make big bucks.
Without including the drops of less than 20%, the average bull market endured a whopping 9.1 years with a cumulative return of 76.6%. Including all the market hiccups, an average bull market lasts an average of four years with an incremental return of 129%.
However, this data doesn’t necessarily mean that the following bull market will last for more than 48 months.
Since 1940, the shortest bull market we have ever seen was right after the Dot-Com bubble, when the stock market bubble rose to 24.4% in just a matter of three months. There was also a brief period where the market ascended by 24% during the great recession.
History teaches us that bull markets last longer than bear markets and that volatility in the market is extremely common.
Investors tend to just follow experts when they say, “it’s the perfect time to buy,” but if you want to make huge gains, you should refrain from investing this way. Essentially, stocks are forward-thinking, so the best time to buy is “before” everyone else says “it’s the best time.”
Avoid shifting one financial plan to another. Stick to your initial plan and be consistent with it. Regardless of how the market is doing, if your investing strategy is holding long-term (about 10-20 years), you would never lose a huge amount of money.
Investing your money in index funds consistently will make you money a lot faster than any other strategy.
