How to react to a volatile stock market and speculations

In the past few weeks media has been full of financial analysts trying to shed light on the financial markets. Is recession coming? Is the bottom close? Are we looking at a rally soon? The preachers of doom are many but there are also quite a few analysts with a more optimistic outlook saying that the bottom is near and that a recession is mostly priced in already. Meanwhile the market lives its own life and continues its ups and downs (mostly downs for now).

It is impossible to pinpoint when we will hit bottom. However, there are many indications that the markets will fall deeper before turning around. “Until there is irrefutable evidence that inflation is headed back down and that a recession is not in the cards, calling a market bottom is premature,” said Greg McBride, chief financial analyst for Bankrate. “Investors should prepare for continued volatility and uncertainty in markets throughout 2022 and into 2023,” he said.

If you are a long-term investor, you might want to follow the lead of legendary investor Warren Buffett as his Berkshire Hathaway has gone on a shopping spree in the past few months, buying the dip. Here is a little statistical nugget that supports being invested when the market turns. This is what has happened to the S&P 500 one year after a five months period of a greater than 15% decline according to statistical data for the past 65 years. Only 2 times out of 26 has S&P 500 continued down.

1-year forward S&P 500

There are a couple of things to keep in mind if you think of investing now. First off, the investor needs to be aware of the time frame for the investment. A long-term approach is the safest bet, only investing money that you do not plan on using anytime soon. Secondly, stock-picking is becoming increasingly important as the market looks right now and most analysts are looking for solid value stocks instead of growth stocks. Growth stocks are valued based on future income and when inflation and higher interest rates come in play these stocks take a hit. Value stocks are stocks in companies that has a high value based on past records, in other words, they are valued based on the income they already have and supposedly will continue to have. As the stock market has plummeted, many value stocks have become collateral damage and some of these might see a quicker return when the market turns compared to growth stocks.

Short term investors can find opportunities to invest in volatile markets. However, this type of trading requires a very good understanding of the market and a solid bankroll. It is also very important to have full understanding of the risk involved in short term trading or daytrading.