It's A Good Time To Invest Right Now?

So we do think, you know, look for some volatility, but use that volatility as an opportunity to, we think, position in both equities and bonds, really. In recent months, there has been much speculation about whether the recession has already passed or if it's just beginning, leaving people wondering if it's a good idea to invest this year or if it's better to simply wait. But to understand this, we need to take a step back in history and see that over the last 15 years, we have had periods of low inflation However, this produces adverse long-term effects, which is why we are now paying the price. During the past decade, the United States experienced very low inflation, which allowed the country's most important central banks to reduce interest rates to record levels. Thanks to this, employment increased exponentially, benefiting primarily low-income workers. But now that interest rates have risen more than 500 basis points to combat inflation, we have seen things like the economy breaking down, such as smaller regional banks. Following the fall of large U.S. banks like Silicon Valley Bank or First Republic, smaller and less known banks continued to fall in a chain, such as PacWest Bank, which had approximately $27 billion in deposits, went bankrupt last week. Although this may not have been big news because it's not a large bank, it shows that we are still experiencing a moment of economic instability. Furthermore, this week the Federal Reserve raised interest rates by another 0.25, bringing the total rate to between 5.25 and 5.5 percent, the highest in 22 years. However, even the 5.5 percent is not the actual interest rate, because remember that is the federal fund's rate or the rate at which banks lend money to each other. Our rate is the prime rate, which is usually 2 or 3 percent higher than that. To understand how much these interest rate increases have affected the economy, since 2022, when the Federal Reserve began these increases, it has added an average of $800 per month for each consumer, meaning that it will cost you $800 more to buy the same things you were buying a year ago. For example, if your monthly expenses include housing payments, this monthly payment increased by $724. Additionally, $43 per month is added for car loans and $19 per month in credit card interest, and that doesn't even account for the lifestyle costs due to the hidden inflation tax, which takes the equivalent of about $4.50 per hour of your work. That's $750 per month or $9,000 per year. Despite all of this, the Federal Reserve has officially announced that they do not believe a recession will occur because inflation or the rate of price growth is finally decreasing. Unemployment is very low, and the 30 most traded stocks in the stock market, the Dow Jones Index, have risen for 13 consecutive days, their best performance in the last 36 years since 1987. The stock market is doing very well, and the economy seems very strong. So, is it too late to invest in the stock market, or is it better to wait for a possible recession in 2024? Well, to understand this, we have to talk about interest rates, because they have a significant effect on our lives, and depending on how much money you have, what your job is, and how you like to invest, you might be very happy with these rates or not. For example, if you're looking to borrow money to buy a house, you might be really frustrated because it's very expensive to do so right now, due to sky-high interest rates. But if your job falls into the category of lower-paid jobs, this could benefit you, as it has been discovered that higher interest rates are more beneficial because wages grow much faster. On the other hand, lower and close to zero interest rates, which we have had for almost the last 15 years, can contribute much more to wealth inequality. When interest rates are low, other assets increase in value. What we have often seen is that wealth inequality has increased when interest rates are low. This is because when rates are low and the economy grows faster, there is more economic activity, more people working, and that creates more competition for the average person. While this is more beneficial for companies, as they can afford to pay people less during times of lower interest rates due to the basic supply and demand of the economy. And this is where economists debate whether lower or higher interest rates are better. The truth is, we might have to get used to higher interest rates for a longer time, because we haven't yet paid the price for all the bets people made when interest rates were at zero. Many of these bets made during the low interest rate era are no longer working. Mortgages, for instance, are one of the largest asset categories on banks' balance sheets. And when interest rates rise, the long-term market value of those assets decreases even if there is no default risk. That's where the problem arises. You can encourage everyone to take on debt and borrow, and it might be fine this year. But next year, there could be a cascade of refinancing that really harms the economy. There might be buildings that shouldn't have been built, and purchases that shouldn't have been made because interest rates were so low at that time. And what it really means is that we haven't yet seen how many more things could break in the economy when those loans come due for refinancing, especially in commercial real estate. So, is it better to invest considering all these risks, or is it better to wait and hold onto your cash? The answer is uncertain, as no one can predict the future. However, throughout history, several of the most successful investors have proposed some theories and indices that go hand in hand with market growth or decline. For example, the Champagne Index. The theory is that when things are going well, Champagne flows, and when things are bad, Champagne slows. You can see that Champagne sales actually decreased during a recession and then increased after it. Now, last year in 2022, Champagne sales really decreased, so we might see that this bubbly index exposes the bigger bubble. Then, there's the Library Index, specifically referring to the New York Public Library, which has the largest public library system in the country. The theory behind this index is that in times of recession, when people have fewer jobs and lower incomes, they tend to go to the library more and take advantage of what's free. Currently, it shows that attendance is increasing, something to keep in mind. We also have various indicators that give us a sense of whether the market is in good or bad shape. For example, generally when people have more money, they tend to spend more, and it's common for people to eat out. Similarly, when things go bad and people don't have money, they tend to stay home and eat in to spend less. But perhaps the most serious indicator that people really watch is called Don't Challenge the Federal Reserve. It's a sophisticated way of looking at macroeconomics or something called monetary policy, which includes things like interest rates. And interest rates are based on underlying inflation, which is currently still too high at 4.8%, not the 2% that the Federal Reserve would like. But no matter how much economists try to relate interest rates to stock market outcomes, in the end, even interest rates don't really make a big difference in investment. Here is a good example. The SP500 has risen almost 20% this year, and the NASDAQ, which is mostly composed of technology stocks, has risen a whopping 36% at a time when interest rates are relatively high. But how does this make economic sense? Well, historically, it doesn't. In 2018, for example, interest rates started at 1.5% and peaked at only 2.3%. Those rates are much lower than today's, so you would think that cheaper money means people borrow more to buy more assets, and therefore asset prices go up. But that same year, the stock market fell nearly 4.5%. Another good example is 2002, when interest rates were below 2%, and that year the stock market dropped by 22%. All of this shows that you shouldn't base your investment decisions solely on interest rates, financial gurus, or even what the media tells you. Similarly, while it's good to be cautious about when you invest your money, another investment mistake is not investing in time, meaning when the market is low. Data shows the risk if you don't invest and wait for the market to correct. To help you understand this better, let's look at it this way. If you missed the top 10 market days, for instance, you would miss out on about half of the market's growth. And if you missed the top 30 market days, you could earn up to 83% less in the stock market compared to someone who invested their money on those days. In fact, if you take hypothetical $10,000 that you invested in 1930, but missed the top 10 days in each decade until the present, after 93 years of investment, your $10,000 would be worth approximately $12,800, an increase of 28%. But if you stayed invested and didn't miss the best days, you would have increased your investment by 18,000%. Or in other words, your $10,000 would have turned into $1.8 million. That's a significant difference, which is why economists say you should never try to time the market. If you ask the average consumer in the United States what they think about the economy, they will say it's in very bad shape. In fact, 4 out of 5 Americans believe that the economy is bad right now. However, the trend is reversing, meaning that more and more people think the economy is improving, which could be a sign of market recovery. Despite all this data, there are investors and economists who continue to buy shares of indexed funds and companies because the data shows that long-term indexed funds always show gains. But what do you think? Do you plan to invest in the stock market this year, or do you think it's better to wait until the next one? Let me know your opinion in the comments, and don't forget to give us a like and subscribe if you enjoy this type of content.