The stock market’s volatility in the last few months has left investors wondering if further downside is in the cards or is it possible that the stock market recovers and sets new highs? Numerous micro-and macroeconomic factors affect markets, so it’s difficult to predict their future.
However, the stock market’s history has shown that corrections are normal. A price retracement doesn’t necessarily mean that a crash is imminent. Sellers may have temporarily stepped in, but higher buying pressure may resume the uptrend. Benzinga explored factors influencing a potential market recovery.
Can the Stock Market Recover?
Rarely has the market gone up in a straight line in a bull run or straight down in a bear market. The market operates in waves, consisting of buyers and sellers battling for market positioning.
Just because the price has dipped in a bull run doesn’t signify a reversal. Investors watched the S&P 500 lose 35% of its value in March 2020, then make a V-bottom and go on to set an all-time high in January 2022. The Dow Jones Industrial Average lost almost 40% of its value before also making a V-bottom and then setting an all-time high.
Source: TradingView
These two major indices have shown that the market can make a recovery after a significant crash. Recently, factors such as interest rates, geopolitical events and supply-chain issues have played a big role in determining stock market trends and are likely to determine the market’s long-term future.
Why is the Stock Market so Unpredictable?
The market consists of many participants, each with their own sentiments and needs. It’s the collection of those sometimes-erratic behaviors that determine market direction. Considering the market consists of numerous participants, it’s difficult to determine how they will position themselves.
Some factors that influence investor sentiment are news and events. Bad news is usually associated with the bearish sentiment so that may give investors an understanding of market direction. But even such factors don’t enable investors to determine how much the market will drop before a reversal.
The other problem with news affecting markets is that announcements are unexpected and cause drastic price volatility. And there’s always the possibility that the market may misinterpret the news, causing price action to counter sentiment.
Emotions have a tremendous impact on markets. Fear and greed play a role in how investors trade, but the degree to which it affects market direction is difficult to determine. Although a fear and greed index attempts to determine sentiment, investors can’t rely on it to be completely accurate.
Company earnings and CEO resignations are almost impossible to predict, yet they affect markets. It’s common for company results not to match expectations, making sentiments swing and prompting traders to react emotionally — usually yielding adverse trading results.
Global economic indicators influence the market’s price. Even though a U.S. company is listed on the New York Stock Exchange (NYSE) or Nasdaq exchange, its operations may be international. So global events have a direct impact on its operations and market price.
Combining all those factors to determine price direction is extremely difficult, making the stock market unpredictable in the short term. It’s easier for investors to make money in the stock market by investing long term. Although the stock market is volatile and crashes, it’s shown to provide consistent returns over a long period.
What is the Long-Term Outlook for the Stock Market?
The 2008 global financial crisis caused markets to crash. But some indices quickly recovered and have rallied since then to set all-time highs. Regardless of how severe crashes have been, the stock market has proven that it recovers.
The key thing for investors is time and patience. The market needs time to recover, often several years after a massive crash. The Wall Street Crash of 1929 had devasting effects on economies, and hope was scarce. But just like prices go down after rallying, they can go up after a multi-year bear market.
Warren Buffett, one of the most successful investors of all time, stressed the importance of long-term investing. He stated that investors who weren’t prepared to own a stock for 10 years shouldn’t think about owning it for 10 minutes.
Buffett follows a buy-and-hold investment strategy, requiring him to buy equities and hold them for long periods. One of the reasons Buffett believes in that strategy is that stock prices fluctuate during short periods, but strong stock fundamentals tend to provide significant returns.
Another strategy that Buffett follows is value investing. He spends several hours a day reading company financial reports and choosing stocks based on their overall potential. Value investing involves buying stocks that may be trading below their actual value.
Bad news may cause traders to overact and result in short-term price volatility, causing the market to underestimate a stock. Value investors believe that a stock’s current price doesn’t correctly reflect the company’s strong long-term fundamentals.
Are all Market Downturns bad?
No financial market has rallied without incurring a correction or a crash. It’s normal for markets to retrace after significant price action and to be in bear markets for years before rallying again.
Market downturns provide several benefits. Investors who fear missing out on a surging stock get another opportunity after a downturn. After all, the point of investing is to buy low and sell high. Some investors believe that a market downturn is a great position to buy stocks. It’s referred to as buying the dip or buying at a discount, with the belief that the stock’s price has temporarily lowered before it rallies again.
Traders can profit from rising or falling prices. If sentiment has turned bearish, traders can place a sell position and profit if the price goes lower.
Falling prices also give investors an opportunity to assess their risk appetite. After experiencing plummeting prices, investors can determine if they can handle such volatility should it happen again. If they can’t, that investment has shown it’s not for them. They’ve determined their appetite to be risk-averse and should seek such investments.
Compare Stock Brokers
Knowing which stocks to buy and when to buy them requires investing with a reliable stock broker that offers signals and trading education. Benzinga searched the market and found the best stock brokers.
Frequently Asked Questions
Will the stock market recover in 2022?
Determining market recovery in any year is difficult because of the numerous factors that impact it. The market may recover in 2022, but nobody can state that with certainty. However, what has proven to provide market recovery is long-term investing.
Investors such as Warren Buffett believe that a stock yields the highest return when held for several years. Investing long term enables investors not to worry about short-term price volatility and rather concentrate on long-term potential.
Even if the stock market doesn’t recover in 2022, its history has proven that it will when given enough time.
Should I pull out of the stock market?
Each investor should make their own decision about when to invest and when to pull out. A market correction doesn’t mean that it will lead to a crash. Prices may be dipping lower before reversing and making new highs.
It’s important for investors to determine market direction using technical and fundamental analysis. Using emotions to decide market positioning usually yields an incorrect decision. Trading decisions should be devoid of emotions.
About Goran Radanovic
Equities, Forex, Crypto