In June, the US entered bear market territory formally after a 20% decline from its top in January. There is an immediate global discussion about whether this is the beginning of a lengthy decline or just a hiccup before a stock market revival.
Which one is it then? Will the stock market rebound as we enter the second half of the year, or should we fortify our defences and brace ourselves for further declines?
What’s happing with the stock market so far in 2022?
It’s helpful to consider how we got here and remind ourselves of a few things before we wonder when the stock market will return.
First of all, market volatility (ups and downs) comes with the territory. It’s important to emphasise that this is nothing new because it’s possible that this is the first time new investors have encountered a fall from grace.
The cost of hoping that company shares will outperform cash over the long term is ups and downs that come in as many sizes as McDonald’s drinks.
We might have been duped into believing that indices only go in one direction by the US IT sector’s two years of spectacular outperformance. Nobody likes to see their stock decline, but before prices become wholly divorced from earnings, a reality check might not be such a bad thing.
However, it involves more than just financiers pushing the pandemic tech narrative.
Why is the stock market down?
Regrettably, equities are currently under attack from all sides. Additionally, there are bottles from all over the world in the liquor cabinet hidden behind this year’s quite awful market cocktail.
Following Covid’s threat to return, China was once again forced to shut down entire cities. Shenzhen, a significant financial and technological powerhouse with more than 17.5 million residents, vanished overnight when the government’s zero-Covid policy went into effect.
The pause in China’s recovery has been felt across the globe because of its significance in terms of manufacturing and global supply networks, as well as its demand for commodities to power its enormous facilities.
Companies already struggling to keep up with a post-pandemic rise in demand are dealt a double blow by China’s ongoing lockdowns. The issue was that they drastically reduced capacity during the pandemic and have had trouble ramping it back up to meet demand.
All of this has caused inflation to soar this year, adding fuel to cost flames around the globe. And central bankers like J. Powell have been pounding on the brakes and raising interest rates because they are terrified of runaway inflation and the harm that could result from it.
High-valued technology has suffered as a result, and as the top brands earlier this year accounted for about 25% of the US market, their demise also affected the rest of the market.
We might, however, be about to complete a circle. The markets now appear to think that Powell’s and his Federal Reserve bankers’ actions will cause the US economy to enter a recession. In fact, a lot of analysts already believe that the US is in a recession.
Supply networks may be beginning to hum once more as all of this is happening. In light of this, we might be in for a time of decreased demand caused by a recession and rising supply.
How long does it take for the stock market to recover?
It seems sensible to look at the past and attempt to extrapolate from previous bear markets to the current one. When we don’t know the answers, we constantly try to invent our own patterns or hunt for existing ones to comfort us.
However, given the enormously broad spectrum of variables influencing markets before, during, and after prior disasters, it is not the best use of our time.
Therefore, you won’t discover it if you’re looking for a stock market recovery time chart that you simply wish to follow, like a Jamie Oliver 30-minute dinner. Your terror, not your composure, is what is speaking.
Since World War II, bear markets have, on average, taken 13 months to get from their peak to their bottom, while it takes 27 months on average for the stock market to recover.
Zoom out and there are reasons to be a little more upbeat even though it might sound like a torturous trek down and back to breakeven.
Will the stock market go up again?
At the top and bottom of the market, nobody sounds like a bell. And there’s a good reason why we ought to accept that uncertainty. It enables us to look at businesses in real life and determine whether the market is treating them properly.
If everyone possessed a reliable Magic 8 Ball and could accurately forecast when the stock market will return, how the trajectory will look, and which stocks will do well, the market would become completely efficient. There are no mispricings, no opportunities to purchase equities for less than they are worth, and no use in actively picking stocks.
Even while it can be unpleasant, uncertainty offers us as investors opportunities.
Therefore, it would be preferable for us to focus on the businesses we believe are being unfairly tainted by the general downturn while we’re all searching for the catalyst that propels us forward once more.
History has shown us that this moment will pass, so there’s no point in holding your breath in hopes of being able to exhale in relief once the stock market has recovered. Perhaps this is a good opportunity to consider some recent high values in your portfolio.
What are the possible recovery scenarios?
It’s interesting to think back on the pandemic recovery scenarios that were promoted. The optimistic V-shape changed into a U-shape, then came a potential W-shape and the perplexing K-shape. We’re still not entirely certain what that one meant.
Every day, more possibilities were added to the alphabet soup.
Actually, it indicated that everything was possible. However, if you lay them all out in advance, you can’t help but succeed at least once and congratulate yourself. Clock issues and all that.
Therefore, while making technical predictions about a potential rebound is basically pointless, there are some general trends that could lead us in the right direction.
Investors specifically want to see inflation decline and interest rates remain unchanged in relation to economic difficulties.
Realistically, markets might react positively at first if governments manage both.
Mathematically speaking, valuations would increase if rates started to decline and inflation started to decline.
However, when it comes to restoring investor confidence, the market’s decision that valuations are unreasonably low in light of the challenges it faces will likely mark the turning point. Markets only need to perceive that the problems of the risk provided are amply reflected in share prices; problems don’t necessarily need to go away.