First of all, lets get real.
“It is very hard to predict whether the market is at the bottom or not”.
Nevethless investors can use past data to analyse what happened with the Stock Market in similar interest rates cycle and ultimately use such as data to make sensible decisions in the market.
“This article won’t take too long and it is an easy reading, so lets start with inflation.“
When inflation runs too hot or asset bubbles get out of hand, the Fed and reserve banks around the world raises interest rates to cool things off, thereby reducing liquidity in the economy. When higher rates ripple throughout the entire economy. Mortgages, car loans and business loans become more expensive, slowing down cash flows. This can lead businesses to amend or pause plans for growth and consumer purchsing less.
“Now the effect on the stock market”
In the stock market, the first reaction of higher rates, investors tend to sell assets and to take profits, especially in times like now when there’s been a few years of double-digit percentage returns on stocks. In this case we have seemed during 2021. As you might have seen over the last few months, investor decisions like this can lower stock prices—individually, at least, if not across major market sectors.
“Now lets have a look what happen in the past at similar stage of interest rates cycle”
Dow Jones Market Data recently analysed the five most recent rate hike cycles to see what history says about stock market returns in these periods. Their analysis—duplicated in the chart below—illustrates that during these five long-term periods, the three leading stock market indexes only declined during one rate hike cycle.
US MARKET – Note that this is specific for US Market, that obviously tend to generate a cascade effect in ASX.
⬆️ Feb. 94 to July 95
DOW 16.30%, S&P500 13.80%, Nasdaq 18.10%
⬆️ March 97 to Sept. 98
DOW 17.40%, S&P500 32.60%, Nasdaq 40.00%
⬇️ June 99 to Jan 01
DOW -1.60%, S&P500 -5.00%, Nasdaq -13.30%
⬆️ June 04 to Sept. 07
DOW 28.70%, S&P500 30.00%, Nasdaq 26.90%
⬆️ Dec. 08 to July 19
DOW 213.70%, S&P500 243.10%, Nasdaq 442.00%
Now the overall average change for the US Markets is:
- DOW UP by 54.90%
- S&P 500 UP by 62.90%
- Nasdaq UP by 102.70%
= Median % Change 17.40%
So What to buy them?
“Whatever good quality businesses that has fallen the most and represents fundamental and technical value, one thing is certain, you don’t want to buy stocks when they have already recoverd, right? “
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