MARKET CRASH, HOW BAD WILL IT GET?
Understanding what is going on in the markets and how to handle the volatility
I want to share what I am thinking and doing after the painful correction growth stocks have suffered over the past few weeks.
I have read that the market is crashing because of inflation fears, the federal reserve announcing a halt to quantitative easing (money printing to stimulate the economy), the Omnicron virus variant, the algorithms, market liquidity, and many more explanations.
After a crash or sharp movement of the markets, there always will be reasons to justify what is going on. Nobody can weigh each of these factors. So how do we think about it and handle it?
I am sharing a very long-term journey so simply put the current correction is just that, a bump on the road. It is painful to see my portfolio lose value significantly but I know that sitting tight is the best way through.
But what is going on? Here is my explanation:
we are in a secular bull market which means that the value of the SP500 and NASDAQ will be higher than today in 2, 3, and 5 years;
valuations were stretched (high) and a significant correction was likely, in the context of a bull market;
inflation fears, the slow down of the FED quantitative easing, and the last news from the virus made the perfect combination to spark a sharp correction;
specifically, higher inflation puts specific pressure on high multiple/high valued stocks as expected higher interest rates, everything else equal, makes valuations shrink;
a strong rotation from high valued stocks to bonds and value stocks started in mid-November and exacerbated over the last 3-4 weeks
What to expect?
in the very short term, nobody knows
personally, I think that many growth stocks are oversold
the ARKK ETF which is a good reference for high growth stocks is down -40% from its highs, while the SP500 is just -3% below its all-time highs!
the overall credit conditions are super healthy and although the FED is starting to reduce its quantitative easing, it is still very early and we have ahead many months before seeing any effect on the economy and interest rates
so I expect the bull market to continue even if will keep facing choppiness in the next few months
and when a more clear understanding of inflation and interest rates expectations will emerge, Growth stocks will lead again
Is this a buying opportunity?
Yes, I believe it is. Owning companies that are growing above 25% per year in sales, increasing earnings and profitability is still the strategy I want to follow.
How to buy the dip?
Having cash to invest, spreading the purchases over the next few months is the best strategy.
How to sleep well?
Even for long term investors, my best advice is the following:
invest in stocks only money that you won't need for the next 3 years or so;
when you pick a stock, decide how much you are willing to lose and set a stop loss (ex. -25% or -35%)
update your stop losses every 3 months or so
For some context, I suggest watching this video from a person I like to follow because of the quality and perspective of his technical analysis.
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Important: this is not investment advice. Consult a licensed financial advisor before making any investment decision.