When will the stock market recover?

I was randomly checking the Google Search Console and noticed that the following was the most searched query in the past few days: “When will the stock market recover”

And no, there was no question mark or at least Google did not indicate that there was one.

The first question is what are we recovering from. To me, it is obvious that the people searching for an answer are referring to the recent S&P 500, Nasdaq, Dow Jones, FTSE 100 corrections. Pick your index; the situation is pretty much the same except for Chinese stocks, which are in a prolonged bear market.

 

 

Therefore, I can only assume that the question is when will stock markets return to their pre-October correction levels? For the Nasdaq, the question would be: when will the index return to its 8,000 point-level?

 

The concern is only natural. The people who are looking for answers have likely lost money. They may even have lost substantial sums in a reasonably short amount of time. And to make matters worse, they may not have experienced a correction or significant downturn because we have been in an unstoppable bull market for the past ten years or so. This makes the experience of losing money even more frightening, especially if it includes money that was meant for retirement.

In one of my pension pots, I had lost approximately £2,000 at one point. Now, I am “only” down £1,750 or so. My pension contributions currently average £1,800. For this particular pension pot, I lost a month worth of pension contributions earned from hard work.

 

Rich people have higher chances at successfully timing the market

People who are interested in personal finances and other finance-related topics know that it is generally a bad idea to time the market. But why is that?

 

Markets are imperfect

The reality is that market-makers, large financial institutions and high net worth individuals have an informational advantage. Let’s call them the sophisticated investors. They just have more information than the average guy buying and selling Apple stock or an ETF.

It does mean that those sophisticated investors are trading on insider information. Some definitely are and they may or may not end up in the crosshairs of a regulator such as the Securities Exchange Commission in the U.S. or the Financial Conduct Authority in the U.K.

What they have is a real-time insight into what is going on in the markets. They lead transactions and trades on a daily basis. Therefore, they know investors, they know what investors are looking for and pushing back on. They have a better sense of market conditions before anything gets printed in the Financial Times or the Wall Street Journal.

 

Even if sophisticated investors sat behind a desk without talking to anyone, they would still have access to information before the average retail investor (like you and me). They would have access to a Bloomberg Terminal, a special computer used in the finance industry to process trades and receive live financial information. Whatever you read in the Wall Street Journal or even on a Twitter at any time of the day was probably published an hour before that on Bloomberg. A subscription for one computer is thought to cost at least $30,000 a year. The price may vary based on the number of terminals you own and your subscription.

Therefore, you can be as smart as one of those sophisticated investors, the odds are still stacked against you. The game is essentially rigged. It’s just best to acknowledge it and move on. At least the decisions you make from now on will be slightly more informed.

 

It’s easier to time the market when you do not need the money

Sophisticated investors are rational individuals. They are not going to bet 20% of their net worth to buy the dip after a correction in the hope of making a quick profit. So then, why would you do it? When I read stories about people putting their entire worth in one stock, I wonder if they have inside information or if they are just naïve.

If we assume that such sophisticated investors are rational and do not have inside information, then any big bets they make is likely to be with money they do not need. At the very least, they know that whatever amount the loose will not dent their lifestyle or investment strategy because they expect other returns to generate sufficient cash flow elsewhere.

 

Ironically, you have higher chances of being successful in risky investments/bets. As you don’t need the money, the stress levels are significantly lower. If you make a profit, great. If not, too bad and let’s move on. Therefore, you are less likely to make emotional decisions when the trade starts losing money.

 

Asking the right question

“When will the stock market recover” is not the right question. It implies that you are desperate for stock prices to return to their previous levels in order to recoup some lost money.

It might be obvious to most of you. The mindset is not “how do I recover my money” but rather “how can I seize this opportunity to make more money.”

 

Catching a falling knife is hard. However, unless you are using options or other instruments with time decay (theta) built in, it is still somehow doable if you take a very long horizon for the investment made during the dip.

To give you an example, I did not wire £20,000 in my brokerage account after the October crash. For a month or so, I did nothing, which allowed me to notice that markets have not recovered and remain fidgety. For what it’s worth, I believe that markets will remain volatile with a downward trend if U.S. tariffs over Chinese imports increase to 25% on January 1 and if the Fed signals that it intends to continue to raise rates. In addition, add that corporate earnings are artificially boosted with possibly unsustainable tax cuts due to the ballooning deficit and you are starting to get a toxic cocktail.

From a European standpoint, Brexit remains an unknown until March 2019. More importantly, the concerns surrounding Italy’s budget will be frankly displayed after May, therefore risking an escalation with the European Commission. Why May? That’s when the next European elections are to be held. The European Commission will refrain from taking any action against Italy that could fuel Eurosceptics and boost their chances of winning more seats at the European Parliament.

 

Disclaimer: those are only some quick thoughts of mine. They represent my personal views and should not be considered investment advice. You need to talk to your financial planner and/or take a view on the market and act accordingly.

 

While I don’t expect an immediate meaningful rebound, I could be wrong. Donald Trump could make a deal with Xi Jinping, therefore removing the threat of a trade war. Renewed confidence in the outlook of the economy could prompt additional investments from businesses and additional spending from households. Stocks would get a boost.

As a result, I decided to increase my pension contributions by 1%. My employee pension contributions now represent 4% of my annual salary. This comes on top of the 5% contributed by my employer. This is a temporary measure as I am subject to the tapered allowance limiting me to £10,000 a year. I have primarily using carry-forward from previous years when I had failed to make sufficient contributions.

As my pension contributions are primarily directed to purchase a mix of equity and bonds, I should be buying the dip in both asset classes. The tax wrapper is simply an additional benefit to ensure that I get to keep a maximum of profits – should I be right.

 

Conclusion

I suspect that some of you will be disappointed in this post.  I can’t tell you for sure when will the stock market recover because no one knows.

It’s worth noting that the recent correction is only a minor pullback in light of the recent surge in valuations of those past two years. There is room for things to get worse. Any buy-the-dip strategy should be qualified with a long-term view of markets: buy the dip but buy it slowly. You do not want to arrive at the party too early.

There are plenty of investment strategies. The ones that I tend to be mostly interested in are momentum investing and fundamentals. In terms of fundamentals, valuations are still quite high so it will be difficult to find good bargains. In terms of momentum, you need a catalyst for stock prices to be propelled higher. There aren’t any at this stage and that’s my concern.