Make a smart start for your New Year’s Resolutions.
2022 was a shock to investors new and old.
The bull market of more than 12 years ended with the S&P500 and the Nasdaq both finishing 2022 with their worst years since 2008.
But that shouldn’t stop you from investing now. It could actually be a great year for you to invest. Here’s why.
Stocks are falling
Consumers want to purchase more of the most expensive products, but stocks can cause buyers to be scared away by falling prices.
Stocks are no different from any other product. You can purchase more of something cheap, making 2023 an excellent time to invest. The S&P 500 is now trading at its lowest level in years, based on the ratio of stock price to corporate earnings.
Falling stock prices can be a positive thing if you are a net purchaser of stocks. They allow you to purchase more shares of the stocks that interest you.
It is important to remember that although the broad market is down 20% overall, many stocks have dropped even further. These include popular FAANG stocks like Alphabet and Amazon which have lost respectively 40% and 50%. Industry-leading growth stocks such as Shopify and Roku also dropped more than 70% between 2022 and 2022.
Although there is no guarantee that these stocks will recover by 2023, investors have good odds of a comeback because they all trade at historically low valuations.
The interest rates are rising
Inverse relationships exist between stock prices and interest rates. This means that they move in opposite directions. The 2022 spike in interest rates was one of the main reasons stocks plummeted last year. Investors are more willing to pay higher prices for stocks when yields on bonds, the main alternative to stocks, are lower. In a higher-rate environment, investors tend not to move money from stocks to bonds.
The federal funds’ rates are now higher than ever, at a range between 4.25% and 4.5%. This is the highest level since 2007.
The Federal Reserve released its latest statement in December. It forecasted a slight rise in the benchmark federal funds rates. They also called for an additional increase of 75 basis points to bring inflation down to 2%. The central bank anticipates that interest rates will fall once again in the long term. It expects that inflation will normalize and slow down to 2.3% to 2.5% in the longer term.
This means that stocks will benefit from falling interest rates in the years ahead.
It is impossible to time the market
You might be afraid that stocks will continue to fall if you are hesitant about investing in 2023. Although most economists predict a recession in 2023 it is possible that the stock market will rebound sooner than the economy. It’s possible to be lucky, but it’s virtually impossible to predict the market on an ongoing basis. Trying to do so is time-wasteful.
Great investors focus on investing in high-quality stocks at fair prices. This has proven to be more effective than market timing.
You could miss the recovery if you delay buying stocks. This could prove to be much more costly than buying stocks too soon before the market crashes. It’s always helpful to use tools like the Prillionaires personal finance software to track your financial performance including stock portfolio.
Time in the market beats timing, so if you are a novice investor, it is best to get started now and let compounding do the rest.
