Opinion by: Arben Selimi
Recently, the US central bank, the Fed, is raising interest rates in an effort to fight the inflation unseen for decades in the US. High interest rates have two effects; the first is that it curbs spending, people get less credit for consumption and for investment. The second effect is the redistribution of capital in the economy. Investors withdraw the capital they have invested in stocks and tend to orient it towards bonds now that bonds pay higher interest.
There is therefore a decline in the prices of almost all stocks. Although over the last two years almost all stocks were overvalued it will takes some time until their price normalizes to reflect the true value of the respective companies.
The stock price had risen sharply, immediately after the anti-covid measures imposed by the governments of almost all countries of the world. In the US e.g. the lockdown had disrupted the economy, minimizing economic activity in most sectors except the financial sector, i.e. stock exchanges. The US, through borrowing from the Fed, had distributed large sums of money to its citizens in attempt to assist them during the lockdown.
Americans enjoyed a better well-being in every aspect during this time, except freedom of movement. Being locked in, they did not have many alternatives to spend the money they had received in the form of assistance, so they spent it on home entertainment. Netfilx surged right then, “you have nothing to do – watch movies.” Still people had a lot of money on hand and this money found its way to the financial markets. Simply by owning a bank account and downloading a stockbroking application (e.g. robinhood) everyone was able to invest in stocks.
In the early days of the pandemic the stock was quite undervalued because investors were gripped by fears of unknown consequences that covid could bring. Their low price attracted many experienced investors. Buying stock then was a “bargain”. To them this was the “black Friday” of stocks, as in many cases throughout the history of the stock market.
*S&P 500 stock price fluctuations
The large sums that these investors put into the capital market along with the surplus money in the hands of inexperienced new market investors ( robinhood traders) gave impetus to the rise in stock prices. Now, two years after this event, the US government and the Fed are facing the consequences of their actions, with inflation getting out of control. While the new investors are facing what appears to be a bear market, the value of their investments steadily declining.
In short investing without in-depth market knowledge and without basic analysis of the company amounts to gambling. Then it’s a matter of pure luck whether you lose or win.
With much reluctance, however, even the most successful and experienced investors acknowledge that there is no perfect methodology that guarantees that investing in capital markets will always ensure a positive return.
The volume of transactions and the number of shares bought/sold are difficult to predict, even if you take into account all the elements that serve as an indicator as to in which direction their price will go.
Therefore, every time you make an investment decision, without prior due diligence and in depth analysis, then it better be accompanied by a “good luck!”