How well-informed do you consider yourself? Chances are if you trade the markets, you pay attention to the news, and follow a few analysts and podcasts to stay abreast of the happenings in the world financial markets. Every week as I prepare to write an article for our blog I study and research all the things and topics most relevant to what is currently happening in the markets. As we close out 2022 what can be very instructive is to look at the important market metrics and ask myself the only two questions that matter for a trader:
How did you perform?
What did you learn from the experience?
Here are the broad market metrics as we approach the end of the year 2022.
Regardless of how you cut it, 2022 was a horrible year for stocks and investors. Traders on the other hand had numerous opportunities to get ahead of the downtrends and either hedge or exit their positions.
The Federal Reserve raising interest rates has been primarily responsible for these downtrends after the very loose and open monetary and interest rate policies since the Great Financial Crisis. Many people wonder why the adage that stocks will grow in periods of low interest rates and suffer when interest rates are high is so true and justifiable. The reason for this lies in the relationship between stocks, bonds, and inflation. When interest rates are low, investors typically move money from bonds into stocks because they can get a better return on their investments. This causes stock prices to increase, particularly of those companies that show greater potential and promise. On the other hand, high-interest rates make it difficult for firms to borrow funds, which in turn decreases the profits generated by the firms and else reduces dividends paid to shareholders, ultimately resulting in a decrease in stock prices. Additionally, high-interest rates attract investor capital away from stocks towards other assets with both lower risks as well as lower returns such as government bonds or certificates of deposit which again reduces demand for stocks thereby driving share prices down. But this logic is further confounded by the 40 year high inflationary pressures which we all experienced in 2022. When inflation is high the result for many is an increased cost of living and often neither stocks nor bonds offer attractive risk/reward profiles.
The metric we watch very closely is the real rate of return of risk-free assets. This is calculated by taking the yield on something like a 1-year Treasury Bill which is currently at 4.71% and subtracting inflations as calculated in the Consumer Price Index which is currently 7.1%.
As we close out 2022, the Real Rate of Return is negative -2.39%.
This means that when investors loan money to the U.S. government they are guaranteed to lose 2.39% per year. While this metric is narrowing it is still highly problematic as it perpetuates the problem of the U.S. government losing the confidence of its citizens to invest in their Treasury obligations.
This dystopian reality if the backdrop of the financial markets and the Federal Reserve is attempting to close that gap further so these negative real rates of return will no longer exist.
It is important to note and understand that Negative interest rates were proposed by the Federal Reserve in 2016 to jump-start the US economy. It was believed that forcing lenders to pay borrowers for taking out loans would encourage spending, saving, and investment in the long run. As part of this policy, some Treasury bills had a small fee or penalty associated with them for anyone who held them to maturity. Despite the attempts to stimulate growth with this strategy, it ultimately proved unsuccessful, and several economists suggested that it might have led to a withdrawal of capital from riskier investments. The effects of this policy were limited and short-lived, with inflation not showing any signs of improvement and businesses continuing to struggle. The Federal Reserve ceased its negative interest rate policies after only a few months due to their disappointing results.
The length of a bear market in stocks can vary, but on average they tend to last between 12 and 18 months. Although some bear markets have favored shorter periods, others can last over two years or beyond. While not every investor will experience the same length of a bear market, typically those that stick it out come out better in the long run since stock prices eventually rebound. For example, during the height of the Great Recession in 2008, stocks decreased for about 15 months before beginning their recovery. While every bear market is different, the average rate of decline for stock markets has been calculated to be around 14%, with the most severe bear markets typically experiencing declines between 20-50%. However, the swiftness and depth of stock market plunges can vary greatly from crash to crash, with some happening more quickly than others. That said, regardless of the timeframe involved, it can be difficult to recover losses after a price plunge like this. Because of this, investors should always consider risk strategies when dealing in stocks to protect their investments against potential declines.
As I write these words only 35% of all stocks are trading above their 200-day moving averages. While this metric has improved greatly from the lows of 14% which were posted in June of 2022, this is still far from healthy as far as a bull market is defined.
Traditionally, there are a handful of events which occur for a bear market to transition to a bull market. They are:
Core inflation must signal a consistent decrease
- Jobless claims must demonstrate that they are not rising
- Wall Street Analysts must become optimistic about corporate earnings
- The U.S. dollar must get weaker. A strong dollar makes it more difficult for foreign nations to buy American things.
- Volatility must show continued signs of declining.
- The Yield Curve must not be inverted
As you can see when you study these charts there is some improvement in the economic health and outlook, but it is far from resilient, and we still have a way to go.
But here is what I have discovered to be most important to my personal economic health. I am powerless to change any of these economic metrics. The only thing I can do is make sure that I am not on the wrong side, of the wrong market at the wrong time.
That is why I consider artificial intelligence to be indispensable to a trader today.
There are thousands of things you can worry about in the world. And I wholeheartedly agree that there are horrific financial problems on the horizon. But the only thing you can do to be causative is to make sure you are on the right side, of the right trend at the right time.
Investors’ biggest risk when evaluating the economy as we approach 2023 is attempting to predict how long it will take for it to return to a place of pre-pandemic stability and growth. Although some progress has been made in tackling the economic fallout of the pandemic, these gains can be reversed quickly if certain measures are not taken or if the public health situation takes a drastic turn for the worse. Moreover, price inflation has increased due to increased demand and production bottlenecks, which could create issues across all levels of business. Ultimately this means that there are still numerous risks that investors must consider before moving forward, as it is possible that instability and downturns could reveal themselves at any time in 2023. The biggest risk that economists face when attempting to forecast future economic performance is the potential for unexpected events or activities that may have an unpredictable impact on the economy. Political and social upheavals, such as trade-wars, unexpected election results, or changes in financial regulations can upset the economy in ways that could not have been predicted; these risks ultimately become part of an economist’s job when forecasting for the upcoming year. Additionally, natural disasters or other unforeseen disasters are often not accounted for in early forecasts, making accurate predictions challenging at best. Understanding these external risks helps economists minimize their chances of surprises by accounting for worldwide events as well as local market activity.
In my reading articles, listening to podcasts as well as reading newsletters of many top traders and investors here is a short list of their top worries for 2023.
A more aggressive Fed Tightening Cycle
Attacks on Energy Infrastructure
Bond yields rise more than expected
Contagion from High Yield Defaults
Continued Inflationary Pressures on Food
Continued Turmoil in Crypto assets
Cyber Attacks – Cybersecurity Infrastructure Risks
Escalation in the Russia – Ukraine Conflict
Global Regional Housing Crash
Increased Cost of Living Crisis
Liquidity Crisis in private capital
New Energy Price Shocks
Recession proves more severe than expected
Sovereign Debt Crisis
Tech Bubble continues to burst
U.S. – China Trade War flares up
U.S. Debt Ceiling Crisis
All these issues can certainly be a great source of worry.
But at the core of each of these issues is how will it affect your trading performance?
As I reflect on what I consider to be the biggest economic events of 2022, it’s the U.S. imposing economic sanctions on Russia which created a backdrop for incredible volatility and a trend towards de-dollarization among many of our trading partners.
There is very little I can do about the macro picture of any of those issues. It always will boil down to how did it affect my wealth?
What great traders have come to understand is that performance is strictly measured by simply making sure you are on the right side of the right trend at the right time.
A bear market is typically defined by a 20% drop in the overall stock index, that usually lasts at least two months, followed by a long-term downward trend. There are often three counter-trend rallies before one final exhaustive fall lower.
During Phase 1 investors begin to take profits and drop out of the markets.
During Phase 2 prices have fallen sharply as corporate profits begin to fall. This is often referred to as capitulation.
During Phase 3 trading volume begins to return as traders and investors hunt for bargains.
Finally in Phase 4, the stock market slowly grinds lower often on better corporate news and earnings. This eventually gives way to a new bull market.
Each phase is accompanied by lower lows and lower highs!
Using the artificial intelligence forecast let’s zoom in and look at the last months’ worth of price action.
Clearly, the trend is down.
As an investor and trader, how do you go about making sense of it all?
As a trader, the most important question on your mind is “How do I protect the purchasing power of my portfolio?”
Finding value is becoming a completely consuming activity on the part of traders and investors. The target moves quickly based upon too many factors that remain unseen to the naked eye.
It’s all about getting on the right side, of the right trend at the right time.
Most traders have problems with the timing of their trades.
If you want to win, it’s all about who has the best tools. Artificial intelligence excels at keeping traders on the right side of the right trend at the right time.
Let’s get candid here:
The market is brutally honest – there are winners and losers.
It’s very black and white.
If you need a friend, get a dog.
If you are going to win, someone else must lose.
If survival of the fittest makes you uneasy, stay out of the financial markets.
We live in unique times. The Printing Press is diluting the value of your money.
Everyone is aware that if inflation grows by 7% annually you must grow your portfolio by that amount just to break even when you look at your purchasing power.
Since artificial intelligence has beaten humans in Poker, Chess, Jeopardy and Go! do you really think trading is any different?
Are you capable of finding those markets with the best risk/reward ratios out of the thousands of trading opportunities that exist?
Knowledge. Useful knowledge. And its application is what A.I. delivers.
Join us for a FREE, Live Training. We’ll show you at least three stocks that have been identified by the A.I. that are poised for big movement… and remember, movement of any kind is an opportunity for profits!
Discover why artificial intelligence is the solution professional traders go-to for less risk, more rewards, and guaranteed peace of mind.
Visit with us and check out the A.I. at our Next Live Training.
It’s not magic. It’s machine learning.
Make it count.
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DISCLAIMER: STOCKS, FUTURES, OPTIONS, ETFs AND CURRENCY TRADING ALL HAVE LARGE POTENTIAL REWARDS, BUT THEY ALSO HAVE LARGE POTENTIAL RISK. YOU MUST BE AWARE OF THE RISKS AND BE WILLING TO ACCEPT THEM IN ORDER TO INVEST IN THESE MARKETS. DON’T TRADE WITH MONEY YOU CAN’T AFFORD TO LOSE. THIS ARTICLE AND WEBSITE IS NEITHER A SOLICITATION NOR AN OFFER TO BUY/SELL FUTURES, OPTIONS, STOCKS, OR CURRENCIES. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE DISCUSSED ON THIS ARTICLE OR WEBSITE. THE PAST PERFORMANCE OF ANY TRADING SYSTEM OR METHODOLOGY IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. CFTC RULE 4.41 – HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.