You may be wondering how to know if stocks will go up or go down so you can invest with less uncertainty about the overall direction of stocks. The short answer is that generally stocks go up due to a growing economy and stocks go down due to a recession.
In this post, I’ll expand on what makes the stock market go up, and then back down, and how this affects your net worth if you have stock investments, or even a home.
And as you’ll see, the reasons for stock cycle movements up and down make perfect sense. They are very logical.
Everybody is convinced the stock market is super complicated. If you spend 30 seconds reading this post you’re well ahead of the crowd.
My inspiration for this article comes after investing almost 40 years during times when stocks go up and times when stocks go down, and based on my nerdy obsession with understanding such topics.
What Makes Stock Markets Go Up and Down?
Stocks tend to move as a whole. In other words, the ups and downs of one stock is heavily tied to the overall stock markets.
Here’s what makes the stock market go up and down in a nutshell.
- Stocks tend to go up when the companies in the stock market make more money.
- Most companies make more money when the economy is growing.
- The economy goes through cycles every few years of growing and then not growing.
- Companies make less money when the economy stops growing and we have a recession.
- Almost all stocks drop in recessions.
So, in occasional recessions, your net worth drops if you own stocks and don’t have investments that go up in value when stocks drop, which can be tricky.
On the other hand, stocks go up usually before the end of recessions. Since stocks go down due to recessions, they are often undervalued at this time, so investors who buy them have a great opportunity to build wealth off the bottom.
Plus, home values tend to rise when the economy is growing since there are more jobs, easier lending, and more spending. So, increased stock values and home values are a double boost to net worth.
This means that if you want to know how to tell if stocks are going up, or down, with a higher degree of certainty, just pay attention to the economy.
How Stocks Going Down Affects Net Worth
The most common stock investing advice is to wait out stock market declines. This can work for investors with plenty of time to accumulate wealth from compounding stocks.
I can tell you firsthand that it’s a little more unnerving for investors over 50 to see their net worth damaged by declining stocks.
Bear stock markets cause the net worth of most investors to decline, often by 20% to 50% or more, depending on whether or not their portfolio is hedged with non-correlated investments.
When stock bear markets occur, home values decline, too.
This decline in investment portfolios coupled with home value declines often has a huge negative impact on net worth, especially for investors over 50 who typically have a lot of net worth in their homes.
When Will the Stock Market Go Down Exactly?
No one knows exactly when stocks will go up or down. Every financial expert has an opinion about exactly when the stock market will change in reaction to the economy.
But stocks react to interest rate changes immediately, while the economy is not fully affected by interest rate changes for about a year. (1.)
Another important timing fact is that since 1945 through early 2010, the economy’s growth cycle has been just under 5 years. (2.)
How to Lower Risk Before Stocks Go Down
There are ways to tell if the economy is signaling change and thus reduce investment risk. Interest rate changes are a clear signal about shifts in the economic growth.
The Federal Reserve increases rates to slow down the economy so inflation doesn’t get too high.
And the Federal Reserve lowers interest rates to help the economy grow during a recession.
Again, you can see that this is very logical.
Click below to watch my video on how to know if the stock market will go up or down.
You can use this information to lower investment risk by noticing:
- How long the economy has been growing
- The current economic trend
- Current interest rates
- Interest rate trends
As the economy grows more and more, stocks tend to get more and more overvalued. One way to reduce investment risk is to reduce stocks in your portfolio the more stocks get overvalued.
Treasury Bonds Go Up When Stocks Go Down – Usually
Fortunately, many investors have U.S. Treasury bonds or other assets that hold stable or even go up when stocks go down. This is an example of non-correlated investments mentioned earlier.
Treasury bonds, for example, usually increase in value when stocks go down.
In my post What Goes Up When Stocks Go Down you can read the details and see a chart with how bonds performed in past bear markets.
But the interest rate you make from bonds has been very low for a long time, so many investors own few if any Treasury bonds.
Plus, bonds also drop in value at times, often in relation to interest rates.
You can see how paying just a little attention to the economy and interest rates can help you lower investment risk.
And again, this isn’t hard to understand. It’s very logical and based on data and history.
I have found that when I invest with logic, facts and historical data it keeps my emotions from affecting investment decisions.
So What’s Good When Stocks Go Down?
The great thing about stocks going down every few years is that they can be bought significantly cheaper later in a recession if you have extra investment cash. Click here to read my post on how much cash to keep in a portfolio.
After you read it, be sure to check your investment risk to make sure it is aligned with your desired level of risk.
Yep, we get to pick how much investment risk we want. Read more about that in my post entitled 10 Ways to Reduce Investment Risk While Building Wealth.
Summary: How to Know If Stocks Will Go Up
History repeats itself even though there are always variations. Logical economic shifts happen which will affect your net worth if you invest in stocks or own a home.
By increasing your awareness of changes in the economy beforehand, you tell if stocks are going to go up or down with a higher level of accuracy.
And with this information, you can take action to lower investment risk if you choose.
I write about changes in the economy and share other investing insights in my newsletter. You can sign up to get it here, along with my eBook with our favorite 9 strategies that increase income while building wealth.
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This article is for education only and not to be taken as personal financial advice.