When will Stocks Recover?

When will US stocks recover?

Short answer: Never. Forget about all the prices you saw in 2021. They're never coming back.

Ok, I'm half-joking.

The real answer is not any time soon. Here's why.

The market despises uncertainty. There's massive uncertainty around 3 fundamental issues that affect many economies around the world. They can be summarized in the acronym IRR (Inflation, Interest Rates, Recession).

Inflation

Inflation is simply a general increase in the prices of goods and services. Inflation is generally a good thing because it means the economy is growing. When the price of goods and services increases, companies make more money, create jobs, create value for shareholders, pay higher taxes to governments, etc. Everyone is happy.

Like most things, inflation is good, but too much inflation is bad. As such, Central banks generally set inflation targets that can support sustainable growth. In developed countries like the US and UK, the Central bank's target inflation rate is 2%.

When countries begin to see too much inflation, the price of goods rises so fast that the cash available to citizens cannot keep up. This is where Central banks step in.

Countries around the world are seeing high inflation numbers that they haven't seen in decades. The US was hopeful that inflation peaked in March after inflation fell from 8.5% in March to 8.3% in April. But May came with a shocking 8.6% inflation rate.

As inflation keeps rising, Central banks like the Fed must raise interest rates to curb inflation. According to Bloomberg, 60 Central Banks have raised rates in 2022.

Interest rates

As inflation keeps rising, the US Fed and many central banks have to raise rates to cool down the economy.

It's worth noting that raising rates will not instantly fix inflation. It could take more than 3 quarters before we see the full impact of interest rates on inflation.

Read all about what happens when Central Banks raise interest rates in this article.

Higher interest rates mean consumer and business spending will reduce because it becomes more expensive to get capital. If spending reduces beyond a certain point, a recession could occur.

Recession

A technical recession occurs when a nation's GDP is negative for two consecutive quarters.

The US has already recorded a negative GDP growth rate in Q1 2022, another quarter of negative growth will push the economy into a technical recession.

During recessions, company sales & profits fall, some companies do mass layoffs, those who become unemployed have less to spend, thus causing companies to make less sales & profits, and the cycle continues.

This is ultimately not good for stocks in general but is worse for growth stocks that have been hardest hit in the last 6 months.

When countries are faced with a looming recession, Central banks usually cut interest rates, as they did in March 2020. But they're using higher interest rates to put out the blazing inflation, so that's not a tool at their disposal. This is why you'd frequently hear the term "engineering a soft landing" thrown around a lot.

Can Central Banks curb inflation without pulling the economy into a recession along the way? We'll have to wait and see.

Back to Recovery

For US stocks to even begin the conversation on recovery, we need to know when inflation will slow down, what the new neutral interest rate level will be, and possibly avoid or come out of recession too.

How long is it going to take for this to happen?

Hard to say. But we can guess that it's unlikely to be anytime soon.

It's not all Doom and Gloom

Compared to 2019, the stock market as a whole is up.

Even compared to March 2020, the S&P 500 is up 80% or 17% compared to February 2020. If you started investing in stocks in 2019, you're probably still in the green. You're likely worse off if you started buying in late 2020, 2021, and especially in November 2021, when the market was at its peak.

What can you do now if you started investing in stocks in 2020/21?

If you don't have capital, you can't buy the dip

The common social media mantra of "buy the dip" may not cut it. It can be frustrating to buy the dip while the dip keeps dipping. Moreso, you can only buy the dip if you have capital. So the answer cannot be to just buy the dip to infinity.

Go back to the basics

If you did not do it before, you need to look into why you currently own the stocks you do. What is the investment case? Do some research. As a beginner, you can read opinion pieces. Read both positive and negative views to see the risks and opportunities and try to form an independent view on why you should keep or sell the stock.

Look into getting a financial advisor to help you with this. When you've formed an opinion on why you should keep a stock, you may then proceed to look for good opportunities to buy the dip ??

Diversify

Not all stocks are created equal. While some companies are down 70, 80 even 90%, ExxonMobil hit its all-time high stock price on Wednesday, June 8th.

If your portfolio is heavily concentrated in COVID darlings, you might be seeing the worst losses now. This might be the point to look into opportunities in other sectors.

All stocks will not crash the same way and by the same magnitude. Some may never recover. The example most apt to illustrate this is Cisco. 22 years after the dot com crash, the stock is still yet to recover to the highs it saw during the dot com bubble.

If you had sold Cisco stock early on in the dot com crash and done something else with it, you probably would have lost less. However, if you did heavy dollar-cost averaging during the crash when Cisco stock dropped from around $80 to $15, you may even have made a profit from the investment after some years.

Invest for the long term

"Invest for the long haul. Don’t get too greedy and don’t get too scared." - Shelby M.C. Davis

If you have a long investment timeline and are adequately diversified, it's often best to ride out the downturns.

Final Thoughts

The US stock market rally from May 2020 to November 2021 pulled forward growth in stock prices that should have taken some companies many years/decades to achieve. The market reset has taken back those gains and even more.

In time, we'll see the companies that grow enough to merit the valuation they saw in peak 2021 and the ones that never recover. Only time will tell.