Recession. Layoffs. Decline. Crash. There’s a lot of that going around lately. A lot of downbeat projections and a general feeling of fear and dread.
But what if we told you that the U.S. stock market is just getting warmed up? That the best is yet to come? And if you look away for a little too long, you’ll miss the S&P 500 sailing past 5,000 points quicker than you can say “What Would Warren Buffet Do?”
There’s a concept in investing circles known as recency bias. The idea is that we place greater significance on the events and information that’s most recent, because it’s more prominent in our minds. How else can you explain Drake being considered a great rapper?
That’s what’s happening right now in investment markets. Stocks are down in 2022. Investors are hurting, and our human tendency is to feel like this is now the status quo. The new normal.
It doesn’t help that, for many investors, this is the first major downturn they’ve seen. The year 2008 was a long time ago—14 years now. The 2020 crash was over in about four weeks. The pandemic brought millions of new investors into the market on the euphoria of the crypto bull run, the GameStop frenzy and the stimulus checks burning a hole in our pockets.
Now, it feels like the party’s over.
That’s what can happen when emotions get involved. It’s easy for investors to get lost in their feelings rather than facts. Of course, AI investing doesn’t have that problem, but most of us don’t have AI at our fingertips, so we’ll get to that later.
We’re here to tell you that the party isn’t over. And that’s not blind optimism talking. It’s an inevitable consequence of the world we live in, and it comes down to two factors.
- The world economic system is built on for-profit companies, the majority of which are listed on public markets like the New York Stock Exchange.
- U.S. listed companies make up almost 60% of the global stock market.
It’s really that simple. The U.S. stock market is the biggest player in the biggest game on earth. Betting against the U.S. stock market over the long term is a bet against the world as we know it.
Let’s dive into this.
The global economic system
When the system is working properly, the way our economy works is crazy efficient. Food is grown and shipped often thousands of miles to land at the grocery store six days before it spoils. A million parts from all around the world come together in a factory in China to build a supercomputer that can fit in your pocket. We can send money to anyone, anywhere in the world, almost instantly.
The pandemic threw a big old wrench in the works, but things are slowly getting back to normal. This system isn’t some centrally designed master plan. It’s just a vast collection of people and companies who provide goods and services that allow us all to live better lives.
We pay money to companies who make and stream great content that entertains us. To companies that make delicious foods, or cars to help us get around or clothing for us and our kids. We make decisions every day on where we want to spend our money. On which companies deserve a share of our hard earned cash.
The stock market is a representation of the economic system in action. If a company creates goods and services that can make someone’s life better, they’ll pay for it. If the company does that well enough and for long enough, it will grow and the value of the company will go up.
But it’s not just about where the end consumer spends their money. It’s about every other step in the process along the supply chain. Take a car maker like Ford or GM. They grow and profit by building cars that people want to drive and can afford to buy.
That doesn’t just mean designing something that looks cool, it’s about every single part that goes into making a new car. There are companies that make the tires, the light bulbs, the infotainment screens, the raw steel for the engine block, the fabric for the seats and the different colored paints.
All of these parts represent an entire industry, with HR and payroll teams, with legal counsel, with workers on the factory floor, cooks at the company cafeteria and executives in the C-Suite.
The economy and the stock market isn’t some abstract game that’s played in the confines of Forbes or CNBC, it’s all of us living our day to day lives.
For the global stock market to fall, and never recover, it means this whole system has blown up. The economy as we know it and the world we currently live in doesn’t exist anymore.
Could that happen? Sure, anything’s possible. If it does though, you’re probably going to have bigger problems to worry about than your investment portfolio. Like how to keep the zombies out of your apartment.
The global stock market
According to The World Bank and Credit Suisse, the estimated global market capitalization of every public company combined is approximately $94 trillion, with 59.9% of this value held in the U.S. stock market.
You only need to look at the number two country on the list to see just how dominant the U.S. market is in terms of investing. Japan is next in line, with a global market share of 6.2%. The UK is third at 3.9%, followed by China at 3.6% and France rounds out the top five at 2.8%.
This hasn’t always been the case. Go back to 1899 and the U.S. stock market represented just 15% of the global market cap, with the UK being the most dominant country at 24% and Germany (13%) and France (11%) not far behind. China barely even had a stock market at the turn of the 20th century.
So what happened? Well, over time, the economic system did its thing. The U.S. became the world’s wealthiest country and largest economy, and the natural progression from there was that U.S. companies became the biggest and most powerful on earth.
Whether it’s the golden age of Detroit motoring, the global financial center of New York City or the birth of the tech industry in Silicon Valley, the companies that provide the most innovative, valuable and life improving products and services generate revenue and grow their value for shareholders.
Who knows what the picture will look like 100 years from now, but in our lifetimes? The status quo isn’t likely to change much.
Past recessions and crashes
But it’s not sunshine and rainbows all the time. A key component of the stock market is that it doesn’t just go up in a straight line. Companies and the economy can do well, and when that happens more investors want in and stock prices go up.
Just as quickly, if the clouds start to roll in and the bad news starts to hit the headlines, investors can get nervous. If company revenues start to drop, shareholders will start looking for the exits, and like hitting a fire alarm in a crowded movie theater, it might just create a rush for the door.
The U.S. market has had some big, nasty crashes in its time. The 1929 crash that kicked off the Great Depression is still considered one of the worst ever, when the Dow Jones fell 89%. An oil crisis, unpegging of the U.S. dollar from gold and a general economic recession caused markets to fall 45% in 1973.
When the Dotcom bubble popped in 2000, the Nasdaq collapsed 77% and in 2008 the subprime mortgage crisis sent the S&P 500 down 57%. In 2020, the Covid-19 pandemic gave the market a swift kick and dropped it by 34%, practically overnight.
All of these market crashes have one thing in common. They didn’t last forever.
In fact, the average length of a bear market for the S&P 500 is just 289 days. That’s not a typo. Just over 9 months and the average bear market is done. Finished. Not only that, but once the market turns around, the average bull market runs for 991 days, or 2.7 years. Not a bad deal for investors.
If they’re prepared to stay in the game.
Looking at how the figures work for this, a bear market is considered official when a stock index falls 20% from its high. The start of a bull market isn’t quite as clear cut. Some analysts suggest that a bull market is in play when the market recovers 20% without dropping below its previous low. Others say that you can’t claim a bull market until the index hits its previous high.
The specifics don’t really matter all that much. If investors are making money over a sustained number of months, it’s probably already a bull market or there’s one on the way.
When will the current bear market end?
The current bear market in the S&P 500 was officially called on June 13, 2022. It’s been a rough start to the year for investors and many companies have seen their values plummet.
Amazon fell almost 45% from its high in the middle of 2021. Apple has fallen over 26%, Netflix was down 75%, Meta is down almost 60% and even Warren Buffet’s Berkshire Hathaway was down over 25%.
It’s part of the reason why headlines are so negative right now. Recency bias is hitting us hard. But what does the past tell us? Firstly, we know the old investment saying that past performance doesn’t guarantee future performance, so we don’t know for sure.
What we can say is that on average, the bad times are over after 289 days.
Let’s play this out then. The bear market in the S&P 500 was confirmed on June 13th 2022, but the market began its slide on January 3rd 2022. With this date as the start of the current official bear market, the average bear market of 289 days means that it would finish on 19th October 2022.
So there you go, the bear market will end, based on the historical average, in the Fall and the good times will be back by Christmas.
Such a swift turnaround might not be as crazy as it sounds. We’re already starting to see some signs of life appearing on Wall Street.
Stock market green shoots might be appearing
The second quarter earnings season was expected by analysts to be a bit of a blood bath. Stocks had been falling for a while, the U.S. has had two consecutive quarters of negative GDP growth and the word recession is being tossed around like an old football.
While there have been plenty of earnings misses announced, all in all the figures weren’t half bad.
The market was definitely happy with the results. July saw both the S&P 500 and the Nasdaq Composite post their strongest monthly gain since November 2020. The S&P 500 was up almost 9%, the Nasdaq gained 12% and even the Dow was up 6%.
Depending on who you ask, this could simply be a bear market rally that’s offering a quick breather before we go lower, or it could be that the bottom is in.
The market is definitely standing tough, making gains in the face of a negative GDP announcement, a huge 0.75 percentage point rate hike by the Fed, rising energy costs and inflation in general.
Commodity prices, including crude oil, have also started to come down. This probably won’t flow through to consumers for a while, but it could be a sign that inflation figures are due to start coming back down to earth. Elon Musk even tweeted about it, so it must be true.
When inflation figures start to reduce, markets are likely to react positively, just as we saw them jump on the announcement of the latest Fed rate hike, on the expectation it would help bring inflation down.
It’s also important to remember that the stock market prices in expected scenarios before they actually happen. Right now, a recession is priced in. Investors are allocating their funds on the expectation that the economy will fall into a recession in the near future.
It means that if the National Bureau of Economic Research (NBER) announces it, the market’s reaction may be something along the lines of ‘meh, we know’. On the other hand, if economic data starts to improve and a recession is avoided altogether, investors are going to be feeling pretty damn good and we could see markets rally hard.
Is now a good time to invest?
So does that mean now’s a good time to invest? Well no one can know for sure what the future holds, especially the short term future. But looking back at history, if you’ve got a long enough investment time frame, the best time to invest is when the market has crashed.
Right now there are many stocks that are cheap. Amazon’s business hasn’t fundamentally changed even though the stock is almost 30% cheaper than was in 2021. Neither has Apple’s, Microsofts, Goldman Sachs, Nvidia or many of the other companies in the S&P 500.
If you believed in the companies six months or a year ago, has anything really changed now, other than the stock price?
“Be greedy when others are fearful and fearful when others are greedy.” Those are the often quoted words of Warren Buffet, and right now, there’s a lot of fear around.
According to the CNN Fear & Greed Index, the market is currently in Fear mode, which is an improvement from a month ago when sentiment was at Extreme Fear.
Mentally, it can be a really difficult time to invest because there’s no way to know if the market will fall further from this point. But if you have the stomach for it, and you have enough time to ride out the ups and downs, you could set your portfolio up for some serious long term gains.
As Q.ai’s late founder and CEO Stephen Mathai-Davis recently commented, “It’s time to buy when everyone’s afraid and running to the exits.”
How to invest right now
There are a couple of ways you can play this. If you’re optimistic and you’re feeling good about the market as a whole, a long position in the U.S. market is most likely the way to go.
Our Active Indexer Kit takes a broad position in the U.S. stock market, and uses AI to rebalance each week to find the optimal balance between large caps and small to medium caps, as well as adjusting exposure to the tech sector.
You can also add Portfolio Protection, which adds a hedge to your portfolio to protect it if things go south. That’s pretty unique.
If you’re most bullish on tech, given how hard it’s been beaten down, you could take a more concentrated position by investing in our Emerging Tech Kit. We’ve created this Kit to split the funds between four verticals – tech etfs, large cap tech stocks, new tech stocks and crypto via public trusts.
Again, we use AI to automatically rebalance between these verticals each week to find the optimal balance between risk and reward. Like the Active Indexer Kit, you can add Portfolio Protection if you want to hedge your bets that the bear market carries on for a little longer than normal.
The best part about investing using AI? It sticks to the plan and it can analyze millions of different data points in a short space of time. That doesn’t mean it ignores headlines, viral Tweets and recent events. But it does mean that it can look much deeper than we humans can, to know when to ride these trends and, most importantly, when to get out.
Photo by Mark Basarab on Unsplash