Like many investors, I have invested a large portion of my retirement fund in stocks. And like many investors, I too have been investing in it for a month as my portfolio is falling.
The war with Iran has devastated the stock market, now falling for 5 consecutive weeks and entering the correction zone, which means a decline of 10% or more.
Interest rates have increased significantly and gas prices are surpassing $4/gallon, more than $1/gallon above pre-tournament levels.
When will all this end and stock prices recover?
I recently asked Artificial Intelligence (specifically Gemini Pro) for input. Here is the wording of the question I asked, otherwise known as the prompt:
You are one of Wall Street’s leading experts on the economy, stocks and interest rates. Investors have seen their savings evaporate as higher interest rates and gas prices threaten to drive inflation higher and lower stocks.
Investors are looking for advice and contacting you for answers. They want to know what’s going to happen in three specific areas: stocks, interest rates, and the housing market. What would you tell them?
First, I will give you the answer provided by AI, then I will offer my opinion based on my over 40 years of investing and advice in the stock market.
Here’s AI’s answer
You’ve watched your savings drain away, and you’re not alone. Between rising gas prices and rising interest rates, inflation is threatening to send the stock market into recession.
People are demanding answers. They want to know when the bleeding will stop and what to do with their money now.
According to Bloomberg, recent inflation data is proving to be much more difficult than experts had originally predicted. This means that the era of easy money is over.
This is exactly what you need to do when it comes to stocks, interest rates, and the housing market.
1. Stop waiting for the stock market to save you
reality: Wall Street is angry because the days of falling rates are gone, at least for the near future. Higher gas prices directly hit corporate profits and consumer wallets, which means stock prices will be volatile.
strategy: Stop trying to time it down. This is a foolish act. Instead of panic-selling your entire portfolio for cash, you need to divert your investments towards quality. Look for companies that generate huge amounts of cash and consistently pay dividends.
When inflation rises, you want businesses that can pass their higher costs directly onto the consumer without losing a single sale, like pharmaceutical companies. If you’re betting on speculative, unprofitable tech stocks hoping that they’ll magically reach their previous highs, you’re doomed.
2. Improve the interest rate environment for guaranteed cash
reality: High interest rates are a nightmare if you have credit card debt, but they’re a goldmine if you have cash lying around.
strategy: The Federal Reserve is keeping rates high to fight inflation. This means that you can get highly respectable returns without taking any risk in the stock market. If you have money in a traditional checking account earning zero points, you are literally losing money every day due to inflation.
Transfer your cash to a high-yield savings account, buy a short-term bond fund or lock up a certificate of deposit. You can easily get a yield around 4% or 5% at this time.
Take guaranteed money while it’s just lying there on the table.
3. Face reality on the housing market
reality: Buyers are tired. You have high home prices colliding head-on with high mortgage rates, creating the most unaffordable housing market we’ve seen in decades.
strategy: You need to erase the idea of a 3% mortgage from your memory. It’s not coming back soon. If you’re sitting on the sidelines hoping for a housing crash that will let you swoop in and buy cheap, you’re going to be renting for a very long time.
If you find a home you love and can easily afford the monthly payments today, buy it. If rates eventually drop, you can always refinance. But if buying stretches your monthly budget to the limit, stop and continue renting. Don’t let the fear of missing out force you into 30 years of financial prison.
Now, here’s my opinion
What’s happening with stocks, interest rates, and housing these days is brutal, but not complicated.
Trump’s “excursion” to Iran is fueling inflation and threatening the world economy as higher fuel prices and interest rates filter through to the financial system.
Keep in mind that high gas prices aren’t the only thing you feel when you fill up. They raise the price of everything that is transported, which is basically everything. And oil is also a major ingredient in many products from plastics to fertilizers.
Higher prices obviously drive inflation, but they also hurt the economy, as more of your disposable income goes to gas and less to other things.
As I said earlier, the depth of the damage to the world economy depends on two things:
- how long does the war last
- How long does it take to repair damage
When the war ends, which hopefully will be soon, things will not immediately return to normal. Rebuilding damaged Middle Eastern infrastructure will take months, even years. This will keep oil prices high for a long time, which will result in interest rates remaining high for a long time.
The danger is that higher rates and a slowing economy will result in a condition called stagflation: a combination of rising inflation and a poor economy.
If this continues for a long time, a recession may occur.
what am i doing now
Although I have invested heavily in the stock market, I am still keeping a lot of cash aside. Although I don’t expect the market to change any time soon, I’ve started putting a little bit of that cash in from time to time Invesco S&P 500 Equal Weight ETF.
With rates higher, I also want to add various bond funds to my retirement accounts. But I would wait a bit to see if they can get cheaper as inflation starts to pick up and rates go higher.
In short, I’m doing some dollar-cost averaging into stocks and waiting to add in fixed income investments, at least for now.
Still stressed? See my recent article, “Nervous about the Stock Market? Read This.” And if you’re not already a member of this site, subscribe now for more updates and free expert advice.