There are typically four stages of the economic cycle. The first stage is the expansion stage or boom stage when credit is expanding, stocks are booming, the economy is growing and everyone feels like their investments are green and going up. This is followed by a slowdown stage where asset values have reached their peak and are no longer growing, company profits slow, credit starts to tighten and the economy tends to slow down a lot. The third stage is the contracting stage when asset values start to fall, credit supply begins to contract, there is less money flowing and companies lose money. The economy tends to experience declines in this period and sometimes job losses and loan defaults spike. This is a traditional recession. After this recession we enter into the final stage which is the recovery stage where things start to pick back up, credit starts to flow again and the economy rekindles. If the recovery is sustained it grows into a new boom or expansion cycle, on and on.
Today we are in a slow down stage of the cycle. Cost of capital is increasing due to the Fed raising interest rates after years of zero rate. Stocks and company earnings have slowed down. What does this mean for your investments?
First, it is important to stick to your investment plan through every market cycle. There are opportunities in every market cycle and leaving the markets can be detrimental to your long term returns. While you need to avoid overly risky investments at this time, this does not mean you should abandon stocks entirely. It takes about 30 months on average for rate hikes to start to impact stocks so for now there is still some time to shift strategies to more value stocks. The good thing is that Rise does this for you automatically without any extra work on your part.
The biggest worry for most portfolios at this time is inflation. The US economy has now experienced 14 months of above 2.5% inflation, proving that inflation is not as transitory as most analysts thought earlier. While rates hikes are still happening across most central banks, it has not been enough to slow inflation down. We expect some kind of decline in stock market prices possibly followed by a recession.
How are we navigating this?
In the last two years we have seen more opportunities in real estate than in the stock market. With home prices at great highs and available inventory at less than two months supply, we believe the opportunity in real estate is coming close to being maxed out. Which means that while real estate will continue acting as an inflation hedge, growth will come from non-US markets and nontraditional strategies like Airbnb rentals (we are test running our first Airbnb rental as we speak). At the same time, as stock prices fall we expect to see a lot more opportunities to buy great companies at a lot cheaper prices. So we expect the markets to deliver great returns once we go from slowdown back to recovery. Remember that it is when everyone is selling that the best investors buy.
At Rise, our goal is not to outperform massively in the short term. Our goal is to outperform modestly but consistently over a long period in order to compound your capital into real tangible wealth over time. So despite all the market upheavals, Rise will monitor the market for the best opportunities to acquire high quality assets at great prices in order to grow your wealth. No need for you to worry and stress about your investments. We do all that so you don’t have to. Start investing with Rise at www.risevest.com today.