I have been in the stock market for 35 years and have seen many ups and downs. What I do know is that markets were created to fool investors, so my golden rule is that you should always try to think 1 or 2 steps ahead and ignore what you see at any given time because if you believe in According the efficient market hypothesis theory, every news flow is factored into every price. This includes both markets and stocks. I know this can sometimes be hard to believe, but these days a machine will process information much faster than you and act accordingly. Having information that you believe is going to happen and that is already in the public domain is not an advantage and you will likely lose if you base your investment thesis heavily on this.
Several variables are causing the stock market to be very volatile right now. Some of the main causes of economic uncertainty are changes in interest rates, geopolitical tensions, and persistent global health problems. Additionally, the rapid pace of technological advancement and inconsistent reporting on business profitability continue to impact market fluctuations. Additionally, investors are responding to policy changes by global central banks that are attempting to control inflation without limiting economic development. Stock prices have become more unpredictable due to this climate, which presents investors with both opportunities and challenges. As I mentioned in a recent talk, there is a duality between market volatility as risk and opportunity.
The current state of the market
According to several market observers, the current market climate is similar to the circumstances that preceded previous major stock market disasters. One such catastrophe occurred in 1987. Rising bond yields, significant debt, widespread market pessimism, and high interest rates are examples of factors supporting this view. Investors are increasingly anxious about stock market stability, and when these variables come together, they can create an unstable atmosphere like in past crises. To illustrate how rising bond yields and other economic factors are influencing the current market situation, several experts have made comparisons with 1987. Based on these findings, it appears that the market is going through a phase of increased susceptibility similar to that of the past, caused by comparable macroeconomic pressures. Financial institutions have recently issued warnings about investor behavior and market dynamics that are comparable to those immediately before major market crises, adding to these fears. Market analysts share this cautious view, highlighting the growing pessimism among hedge funds and their tactical preparation for possible market declines. The combination of these variables suggests that the market could be in a vulnerable position, such as those seen just before large declines or collapses in the past.
Your psychology is everything
I always talk about emotion and the stock market. Intense emotions when it comes to money will play a big role in your decision making if you are not careful and you will ultimately lose. Keep in mind that most macroeconomic news is bad and bad news sells very well.
Bad macroeconomic news has a significant impact on investors' evaluations of ownership of individual companies. Following such reports, investors become cautious about taking financial risks and may sell stocks they consider too dangerous in favor of safer investments. This is obvious now because the pullbacks seem to be more violent. Again, assume the stock market is trying to squeeze you out of your good investments.
Sectors that are most susceptible include consumer staples and utilities, which can see a surge in interest during economic downturns, and consumer discretionary stocks, which can see a decline. As a result of a reassessment of the companies' underlying strengths and weaknesses, you may want to sell your holdings. Some investors have modified their portfolios to include more stable investments due to increased market volatility, which is another impact. Strategic moves toward defensive stocks or industries less affected by economic cycles could be considered in long-term scenarios involving persistently poor economic conditions. The cumulative effect of these responses highlights the enormous influence of macroeconomic factors on personal investment decisions.
Confusing markets with companies
So, with this fear in mind, what should you do?
In my opinion, as an experienced investor, buying and selling shares of certain companies in response to changes in the economy is risky. You risk serious injury if you do this. First, increased market volatility may be a result of macroeconomic news. If you react to every update, you risk making rash decisions that don't align with your long-term investment goals. An example of this would be the risk of missing out on future recoveries that could have been yours if you had been patient and not sold your stocks in reaction to bad economic news. Furthermore, although they are indicative of the economy, macroeconomic indicators do not necessarily correspond to the success of companies. While the economy may be in crisis, individual businesses may fare better or even prosper. As they look for signs of growth or resilience in the face of larger economic issues, investors should not lose sight of company fundamentals in favor of macro trends. Additionally, it is not always easy to time transactions, according to macro news. The market may have already discounted economic news by the time most individual investors respond, leaving them with the unintended consequence of selling low and buying high, the opposite of the optimal investment approach. In short, macroeconomic news should not be the only consideration when trading certain stocks; should be monitored closely. Investors will do better in achieving sustained returns by using a balanced approach that takes into account company-specific characteristics, as well as a disciplined investment strategy.
What a true investor should focus on
If you believe that your individual stock returns are affected by your reactions to the flow of macroeconomic news, here are some strategies to help you. To mitigate some of the risk, one of the most effective approaches is to diversify investments across multiple asset classes and industries. This approach can help maintain a comparatively stable portfolio, considering that returns from economic changes vary across industries and asset classes. Also, don't let macroeconomic news influence your investment decisions; Instead, focus on the core values โโof the companies you are investing in. This requires an examination of financial indicators such as profits, debt levels, management quality and other factors that have a lasting effect on the financial well-being and performance of an organization.
Fight against market volatility by establishing unequivocal and lasting investment objectives and criteria. These guidelines should be precise and durable. Before you jump into investing, you should determine your risk tolerance and investment objectives. A degree of transparency of this nature can help prevent impulsive decisions that are insinuated by accurate and momentary economic information. Additionally, consider implementing stop-loss orders, which instruct the sale of a security at a specific price if it drops to a predetermined level. This feature effectively manages risk. This approach can help mitigate potential losses by eliminating the need to constantly monitor the market and react to every dip. It is imperative to maintain vigilance without becoming overly reactive, despite the critical nature of staying informed about the broader economic environment. It is advisable to maintain a general understanding of the potential impact of macroeconomic factors on one's assets rather than relying solely on this information to form hasty judgments.
Final thoughts
After many years in this field, I have come to the conclusion that the stock market intentionally deceives and surprises its traders. Preparation is key, not simply responding to what is happening right now. Keep this wisdom in mind above all else. In the years leading up to market crashes like 1987, there was similar volatility in the market due to factors such as rising interest rates and geopolitical tensions. Stick to the big picture and use strategies like diversification and a deep understanding of business fundamentals to weather any storm that comes your way. Emotional reactions can lead to poor judgment and loss; Therefore, when it comes to macroeconomic news, it is essential to remain calm and make decisions based on careful analysis and not hasty facts.
On the date of publication, Jim Osman had no (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article are for informational purposes only. For more information, see Barchart's Disclosure Policy. here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
