How to Prepare for the Inevitable Stock Market Recovery
Don’t let it catch you by surprise
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Most investors have had an unpleasant 2022, and with dark clouds forming on the horizon, 2023 doesn’t look any better. Consumers face rising inflation that interest rate hikes haven’t stamped out. If history is an indicator, we need a double-digit interest rate to get rid of inflation. The Fed raised interest rates to 20% in 1980 to stave double-digit inflation in that era.
The layoffs are also accumulating. Most big tech companies are freezing hires and planning layoffs. As more people get laid off, economic activity will decline and lead to further losses. Interest rates will rise at a slower pace moving forward, but each hike will hurt the economy in the short term.
With the economy and stock market reeling and headwinds remaining persistent, it’s easy to ignore the stock market for a year or give up on it entirely. Patient investors swoop in during uncertainty to buy shares and let time do its magic.
Buying stocks now can feel like flushing money down the toilet, but we will eventually have a stock market recovery. Paying attention to important metrics and knowing where to put your money can help you reap higher returns. Here’s how to prepare for the inevitable stock market recovery.
Pay Attention to Inflation and Interest Rates
The Federal Reserve’s policies create tremendous market fluctuations. Index funds have experienced intraday 2%+ swings during Federal Reserve meetings and new inflation data. High inflation leads to demand destruction and forces the Fed to continue raising interest rates. As inflation cools, the Fed will pause rate hikes and even lower their rates. This development would be great news for the stock market and investors.
Inflation will show signs of cooling off before the Fed considers lowering interest rates. A single month of reduced inflation isn’t enough of a gauge. Consecutive months of declining inflation can create the setup for a pause on interest rate hikes or even reduced rates. The Fed hopes to begin lowering interest rates in 2024.
