This story is part ofCNET’s coverage of how to make smart money in an uncertain economy.
Investors turned again this week as the stock market plunged back into bear territory. global uncertainty,and have marked a dizzying year for the market.
Now we ask ourselves: What’s next?
With inflation still uncomfortably high and another aggressive rate hike expected from the Federal Reserve next month, the market is likely to have a bumpy ride.
“Investors should brace themselves for more market volatility,” said Mahesh Odhrani, chartered financial planner and president of financial planning firm Strategic Wealth Design.
The short-term fate of the market depends on several factors, so any predictions about what comes next are simply educated guesses. The Fed has hiked interest rates five times this year. well, one as a “soft landing,” according to Federal Reserve Chair Jerome Powell. And while it’s impossible to say how deep this recession might be or how long it will last, such a downturn will definitely cause more pain across the board, including a spike in unemployment.
While experts are pointing to a light at the end of the tunnel, the market usually deteriorates before it recovers. Here’s what five experts said is likely to happen if 2022 comes to a tie and we gear up for 2023.
Where experts predict the stock market
Market uncertainty will continue.
“Investors and markets have so far underestimated inflation and the resilience of the US economy. Market volatility is unlikely to change over the next six months.” — Mahesh Odhrani, Financial Planner and President of Strategic Wealth Design.
Be prepared for an official recession.
“The stock market will also remain volatile in 2023. A 2023 recession is very likely, which means the stock market is headed for more falls.” — Doug Carey, Chartered Financial Analyst and President of WealthTrace.
A guessing game at best.
“Anyone who tells you they know what’s going to happen, you should probably run as far the other way as you can.” — Sonja Breeding, CFP and Vice President of Investment Advisory at Rebalance.
“Reasonable returns” are possible next year.
“If inflation eases because of aggressive Fed action, I think we’ll see decent returns in the stock market next year.” — Robert Johnson, Professor of Finance at Creighton University’s Heider College of Business and Chairman/CEO of Economic Index Associates .
A stock market indicator bodes well.
We’re seeing price-to-earnings multiples for most things coming in much more in line with, or even below, historical averages, which bodes really well for the future.” – Kirill Semenov, CFP and Investment Advisor at Intellicapital Advisors, LLC.
Expect continued volatility
If there’s one constant you can count on in the stock market right now, it’s volatility.
Don’t expect big shifts in market volatility over the next six months as the threats to economic growth remain the same – namely the war in Ukraine, the energy crisis in Europe, global inflation and supply chain issues, alongside multiple climate disasters, Odhrani said.
And what happens to inflation will play a big role in market shifts. For example, market volatility could subside as inflation settles and the Fed begins to ease its rate hikes, said Sonja Breeding, CFP and vice president of investment advisory at Rebalance. But she also warned: “I don’t have a crystal ball. It’s pretty hard to say.”
A recession by the summer of 2023 is likely, which means thefor a little longer, said Doug Carey, Chartered Financial Analyst and President of WealthTrace, web-based financial and retirement planning software.
The development of the US economy in the first half of 2022 is in line with this— two consecutive quarters of decline — an official recession has not yet been declared. Still, the economy remains shaky and this is reflected in the current market development.
Although experts can make some predictions based on past market trends, don’t rely too much on forecasts. “Anybody telling you they know what’s going to happen, you should probably run the other way as much as you can,” Breeding said.
The signs point to a market recovery next year
It’s not all doom and gloom in 2023, however. Historically, after inflation begins to cool, the Fed begins to cut interest rates and the stock market begins to recover. “History shows that as soon as it is clear that the economy is in recession, the recovery begins,” Carey said.
“If inflation eases due to the Fed’s aggressive actions, I think we’ll see reasonable returns in the stock market next year,” said Dr. Robert Johnson, CEO of Economic Index Associates. At the same time, Johnson noted that any unforeseen circumstances, such as another wave of the pandemic or a global conflict, can derail this.
Nevertheless, the latest data on the price-earnings ratios make the experts optimistic. P/E compares a stock’s current price to its most recent earnings per share and is usually a fairly reliable indicator of where the market is headed. A high P/E usually indicates a growth stock, but it can also mean a stock is overvalued.
“We’re seeing P/E ratios for most things a lot more in line with, or even below, historical averages, which bodes really well for the future,” said Kirill Semenov, CFP at Intellicapital Advisors. “No indicator paints the full picture, but tamer price-to-earnings multiples are generally considered a better time to invest than buying into inflated valuations.”
Investment movements in a shaky market
Ups and downs are a regular part of investing. In this current climate, experts recommend long-term investments that give you a better chance of riding the waves. And with falling markets, investing now could mean buying shares at a lower price.
According to experts, here are some tips for investing in the market.
Play it safe
Choosing lower-risk, long-term investments spread across multiple companies or industries allows you to diversify your risk. Most investors should opt for an index fund over actively trading stocks, according to Johnson.
“Too many people believe that active trading is necessary to successfully build wealth,” Johnson said. “The best strategy for most investors is to simply invest in a broad index fund, either mutual funds or ETFs [exchange-traded funds]that tracks the performance of the market.”
Diversify your portfolio
Instead of putting all your eggs in one basket, trysaid Odhrani.
“Stay diversified within multiple asset classes and sectors,” he said. “They say baseball is all about singles and doubles. Diversification is about hitting those singles and doubles instead of trying to hit a home run. Diversification can smooth the ride over the long term, especially in volatile markets.”
Don’t let your money go to savings accounts
Even thoughhave started offering savings rates of 2% – 3%, most are still hovering near 0%. “Leaving too much money in bank accounts or money market accounts that don’t pay much interest can destroy savings,” Carey said.
While you should leave enough money in an easy-to-access savings account to cover emergencies — between three and eight months minimum spending — you should have cash beyond that.
“If inflation is 7% every year and you have money in a bank account that’s only making 0.5%, almost 40% of the value of that money in terms of its purchasing power is wiped out after 5 years,” Carey said.
According to Carey and Semenov, government bonds are one of the best ways to outperform inflation right now. Treasury Inflation Protected Securities (TIPS), also known as bonds, and I-Bonds. another treasury-backed investment vehicle that both offernow what can help you hedge against inflation.
Stay tuned for the ride
When you see so many stocks down, you may be tempted to sell your holdings. Avoid impulsive movements, Odhrani recommended.
“It’s painful and investors are nervous, but hasty decisions can hurt them,” he said. “We believe the best thing investors can do during crazy times like these is to stay calm, remain invested and diversified, and stay focused on their long-term goals.”
Playing the long game rather than abandoning ship when stocks are falling can ultimately lead to higher returns. “You never really know when the market will peak or bottom,” Breeding said. So by regularly investing a set amount, you can average your overall purchase price regardless of what’s happening in the market.
Ultimately, Breeding hopes the US stock market will pull itself out of its slump.
“We built our society on productivity and determination,” Breeding said. “I think that will continue in the future and strengthen the economy as it has in the past.”