But this is not necessarily the worst news for the markets. Investors just need to do more homework again to find good deals.
“The casino is closed,” said Peter Malloch, president and CEO of Creative Planning, a wealth management company.
“The stimulus days are over. This is now about the market for thinking people. The guesswork is dead,” said Molouk, adding that traders can no longer pass blank checks on SPAC stocks, cryptocurrencies, unprofitable tech companies and other risky investments like hot potatoes. Hopefully, someone else will want to catch it.
Picking stocks seemed a lot easier when the Fed was doing everything it could to try to stimulate the economy. Many investors have no experience navigating the market when the central bank is raising interest rates in an attempt to smooth things over.
“The world is waking up to the fact that zero interest rates are done,” said Max Wasserman, co-founder of Miramar Capital. “Rates were too low and people were taking extra risks because any time the stock market was down, the Fed would cut interest rates. The message was to buy dips because the Fed was on your side. But the party is over.”
Forget the memes and focus on the basics
“Excitement in stock picking and an aggressive approach to investing strategies reached new levels of popularity during the meme stock trading phenomenon in early 2021,” Lindsey Bell, chief financial and markets analyst at Ally, said in a report late last week. “Now, the stock market losses are causing some investors to be nervous about the strategy.”
But Bell noted that home-grown investors can still “make smart investment decisions” as long as they maintain a “very practical approach to investing” and don’t panic.
“When stocks are down, the market is approaching bearish and volatility is high, second investments are normal,” she wrote.
Wasserman said stock picking is not dead per se. Now is the time for investors to look for quality companies that can perform well even as interest rates rise and the economy will likely slow as a result.
“You can’t keep throwing money in the air and expect everything to go up. When you buy an ETF, you buy a basket of stocks and everyone buys the same basket,” Wasserman said. “We don’t chase the same things that others chase. There are more ups and downs to come and hopefully we can build on that.”
Wasserman specifically recommends blue-chip stocks that pay flat dividends and believes investors should diversify their portfolios into a variety of sectors.
The good news – if you like to call it that – is that current market turmoil does not necessarily mean there is a long bear market ahead.
“This may be bumpy, but not a meltdown. This whole turmoil could last less than a year and is already underway,” Molouk said. “This is not like 2000 or 2009. This is a normal bear market.”
“The best place to build long-term wealth is the stock market,” Molouk added. “You might just have to hold your nose if you buy today.”
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