With what’s happening with the market now, how will we know if we hit rock bottom? We’re often asked, “Do you think the stock market has hit bottom and will come back?” Of course, we could give you our flawed opinion (which we will in this episode). Instead, we will teach you how to know the signs in each market cycle and recognize the best time to buy or sell. Tune in now to this episode and gain more insights from Chris Miles.
Disclaimer: This is just for education, not any recommendation
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Has The Stock Market Hit The Bottom Yet?
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I want to talk today about something going on with the markets. Many times, people ask, “I’m nervous about getting out of the market right now. I’m not sure when is the right time.” Maybe we’ve hit the bottom because I’m hearing a lot of people, especially the financial advisors telling me, “This is the bottom. It’s going to come back up so don’t bail out. Now is the worst time to get out because it’s going down.” There’s some truth to that.
You don’t want to bail out of a market after it hits a bottom. The real question is, where is the bottom? How do you know you’re at the bottom of the market? How do you know it’s not going to go down more? How do you know maybe this is the point where it’s going to go back up? That’s the real question here, isn’t it?
I want to share a diagram. This is an overly simplistic diagram but it has tons of truth to it because when you use this diagram, you start to realize that markets are based on emotions as much as we hate it, especially the stock market. It is very much based on emotions. When you look at this, you’ll start to realize where we fall in the cycle.
Like everything, market cycle. The stock market cycle, real estate market cycle, commodities market cycle, oil market cycle and all kinds of things will cycle. Your business will even have cycles. There are always cycles to everything. It’s that perfect ebb and flow of life. It’s a natural course that we deal with. The real question is how do you profit during those cycles? How do you keep making money no matter where the cycle is?
I’m going to dig into my experience from being someone who invested a lot in stocks in the past and even encouraged people to do that and taught people how to trade stocks and options but also bring that into why I don’t do that anymore or if I were to ever do it, I would more dabble in it. I would not invest in it. The real question is, are we at the bear market bottom? Are we at the bottom right now, especially since they announced last month, “Recession is over. We had a positive GDP. We’re out of that six-month recession?”
It is interesting we had this 3-week or 2-month recession, whatever it was in 2020. They’re saying it’s a six-month recession. It’s almost like they don’t want it to be a recession, don’t they? The question is, are we delaying the inevitable? Understand that recessions and stock markets are not the same things. Stock markets can go up even when we go in deep into a recession. Vice versa. Stock markets can go down even when things are booming. Understand that these things work independently of each other. I’m specifically addressing the stock market. If you understand the principle behind this, you start to understand how this applies to any other market that you’re looking at.
Let’s show this. This one uses emoticons. For those of you that love emojis, we have kids in our house that insist on using emojis to express themselves, which is great. That’s a good simple way to do it. You don’t have to worry about hard jargon here but this is the thing that I’m using currently because there is a lot of truth to how this works.
As I’m looking at this, I see the cycle of the market. In the beginning, there’s that optimism. This is midway up as things are already coming back up. As the stock market has already been climbing, there starts to be optimism. This is where people start to say, “I think we’re good now.” That leads to excitement and then thrilled. We always love that thrill and how that goes, don’t we? Then that leads to euphoria.
In 2021, we saw that euphoria was glore. We were starting to show some complacency moving into it in 2020 with COVID. All of a sudden, they pumped tons of money in. They delayed a negative market cycle that we were about to enter. We were already moving into a recession in 2019. We were going in that direction, which is why the Feds were lowering rates even before March 2020.
All this stuff was already happening. It was already preparing for another recession. I remember we’re going to mastermind groups. Investors and we were talking about 2020 being the year of the recession. It’s finally here. It’s been delayed long enough. They started pumping tons of money in during the COVID times and as a result, it artificially inflated everything.
It had a bubble that was already popping and decided to expand us more. It made it very over-inflated. We’re starting to see that recourse. Depending on when you watch this and depending on this recording, which you’ll see weeks after I record this, this is why you’ve lost relatively give or take around 20% year to date if you’ve been in the stock market like the S&P 500. That’s a bad year for the market for a one-year loss.If you've been in the stock market like the S&P 500, that's a bad year for the market. Click To Tweet
Let’s say that the market doesn’t go down anymore. That’s still bad. That’s not a great year. There are people out there claiming that this is the bottom. I’ve even seen people say, “Bear markets only last 9 to 18 months maybe.” That’s ridiculous because they’re basing those bear markets on whether it is truly a bear market, especially when it’s already been over-inflated. I’ve shown other charts and things since then.
We saw this euphoria where it seemed like no matter what you did, everybody made money. Even in real estate and Bitcoin, it didn’t matter. Everybody was making money. 2022 hit. Let’s talk about Bitcoin. Bitcoin and other digital currencies started to tank starting from the beginning of this year like the stock market did.
There’s that complacency. People were like, “Whatever. That’s not a big deal. It’s probably pulling back like it always does before it jumps back up again.” It kept going down. There’s that anxiety as you see here. They start to get worried like, “Wait a minute. Is this the end of good times or not?” Not at the point where you’re jumping out of the market at all. This is the point where you say, “I don’t know. Maybe I should have taken my gains.”
I’ve talked about this way prior to when it was happening. I said, “This is the time when people don’t want to pull their money out because they don’t want to ‘lose money’ from that market top.” What they do is hold on. There’s that denial. The denial says, “This can’t be it.” Currently, in the stock market, we’re between anxiety and denial because there are a lot of people still denying that anything’s going wrong. That’s pretty typical, especially when you start to see it down. It goes up and it goes down. We see it going up.
I’m recording this before the elections. The market is going to start going down more so after the election. This is the beginning of November. The Feds announced the rate increase, which I knew they would. They’re going to announce more even into December and 2023. There are going to be plenty of more rate hikes still to go. Many people are denying that it’s going to be that bad.
With the rate hike that happened at the beginning of November, we have the federal funds rate at 4%, which means prime rates at 7%. There was talk previously about, “They’re going to stop around 4.6%.” I hate to break it to you. Based on Jerome Powell’s strategy, they’re going to keep running it up well above that 4.6%. It’s going to go up more than 0.6%. I don’t think you’re going to see going to December or mid-December where they say, “We’re going to raise it 0.5% more, maybe 3% or 4% more and then we’re done.” They’re going to keep going.
This is the denial phase. Many people are in denial. They don’t think it’s going to keep going but if things do keep running up and they keep driving the economy down, that’s going to drive profitability in companies down way more than what they expected driving the valuations of those stocks and companies so much lower to the point where they have to reanalyze how to evaluate the values of companies.
For the most part, they’re evaluating companies based on low-interest rates but if you take away those interest rates, it starts to change the format of how profits work in those companies, especially where there’s a lot of lending and loans involved or short-term type stuff. That’s very typical in the tech industry, which sadly enough, tech is a big percentage of the S&P 500, even the big six like the FANG stocks that they talk about.
Those stocks are about 25% of the S&P 500’s total movement because of their size. The size of those companies is so big that they influence a large part more than the other 494 companies. That’s something to be concerned about. I’m predicting that it could happen by the end of 2022 but most likely, you’ll start to see this more in 2023. You’ll start to see the fear set in because as markets go lower and then people say, “I’m down 30 or 40%,” then there’s fear.
Once you get to about that 40% losing part or 50%, then it gets to panic. This is when people start to worry and don’t want to sell at all. Some will sell off and say, “I’m out. I can’t handle it anymore.” This is why many financial advisors will say, “Don’t sell off. It’s at the market bottom. That’s why everybody does. They get emotional and sell-off.” It’s true. You sell off too low.
Understand where the market is still above 2020 and where it was back before COVID. Even if you said, “I’m losing money,” no, you haven’t. You might erase most of the gains from the last 2 years possibly but those last 2 years were fake anyways so what are you worrying about? That’s what people do. They wait until it gets to the bottom and then that’s when the anger sets in. When the anger sets in, that’s when people typically bail. That’s when the dumb money leaves.
Remember, there’s smart money and dumb money. Smart money is always acting faster than dumb money. The smart money has already been getting out of the market, which is why it’s been going down all year. There are already plenty of investors that have been pulling their money out or have already pulled out into cash or moved into other places trying to avoid being in these market conditions. They’ve already pulled their money out.
They don’t want to tell you that they’re going to pull out. They want to pull out first before you pull your money out. They wait for you to start panicking and pull it all out. You get that panic and then you get angry. This is the key point to knowing when to buy in any market if you want that once-in-a-cycle opportunity so to speak.
The point is this. Not just the media but even your next-door neighbor, your brother-in-law or that classmate that knows nothing about money starts saying the stock market is a bad place to be, that is when you know we’re about to hit a market bottom. That is the time. That’s when it happens. It’s the same thing that happened with digital currencies, even on the upside.
I knew that when I had a high school classmate that knew nothing about money asking, “How do I buy a Bitcoin?” What is a Bitcoin? That is called dumb money. It’s when they want to go and buy something they know nothing about. They heard about it and it’s now mainstream. When something becomes more mainstream, which is on the news often, that is when you know the opposite is going to occur. If everyone wants to buy at that point, that’s the point you should probably be selling. When dumb money wants to start taking their money out of the market, that’s when you want to go in.
Think of the masses like people that are in a New York City type of situation and there’s some big monster crashing through the city. Maybe it’s Avengers where aliens are coming through and killing people. You see crowds of people running away from those aliens or monsters. They’re running away scared and screaming. That’s the time when you start running towards the battle. You look crazy. You look like an idiot. You look like someone who’s got a death wish.
That is the time you’re running towards where everybody’s running away from. You’re running towards that point because that is where people are leaving and that’s when the smart money gets in. Smart money gets in when everybody wants to get out. When you start seeing that panic leading to anger and people saying, “The stock market is horrible. I should have so much money but I lost so much money in the market. I’m so angry about this.” That’s the time you’re going to gamble in it.
I would not want to do that. I would maybe throw in a little bit of money as I did with digital currency after Bitcoin went down to $6,000. I bought some of that point because I knew that people were fleeing and all the Bitcoin enthusiasts had gotten quiet. They’re all calmed down because they lost 2/3 of their money in a matter of months. Not too dissimilar from where it is right now. Although I haven’t heard a lot of people say, “Bitcoin is bad.”
That’s why with digital currencies, I wonder if maybe it could go lower from where it is. Generally, you’re not hearing all the markets say, “Digital currency is horrible.” Now if you hear everybody saying it, that might be a good time to buy. The same thing with real estate. The crazy thing with real estate is people say, “It’s overinflated.” It’s true in many markets, especially with buying residential homes, things like that for your house. It’s ridiculous, especially in the Western half of the United States.
Think about this. Many times, even as the real estate market was coming back up, there was a lot of disbelief. There are a lot of people saying, “I don’t know so much. I’m not so sure.” Maybe it isn’t real estate. It could take at any time. I heard more people talking about that. The stock market is taking at any time. People lost tons of money in the stock market during the last recession but as it came back up, people have short-term memory loss. They focus more on real estate because real estate is your home. There’s more of an emotional tie to that than your stocks.
Stock is like, “I gambled. I lost in Vegas. I learned my lesson.” That’s how people treat it. With your home, it’s personal. It’s emotional. It’s your home, not just a house. It’s not real estate. It’s the place where you dwell and try to raise your family. It affected a lot of people emotionally and that’s why there’s so much emotion wrapped around it.
That’s why even leading up to 2020 and 2021 as real estate is booming, people were still in disbelief to some level. The masses still didn’t want to buy real estate thinking it was going to go down at some point. That’s how I know real estate never hit a bottom. I’m not saying the Western half of the United States and even certain pockets of the country are going to see some settling of prices but when we invest, we don’t even worry about those prices. We worry more about cashflow and profit.
How do we make cashflow off of that regardless of where the price is? That’s how we make money in any market. It’s coming back to this. With those market cycles, there’s different psychology behind it, those emotions. That’s what you look for. You listen to what people are saying. Don’t get caught up in the media and everything else in a sense of listening to them for advice. Listen to them for clues. Clues about what’s happening and how people are feeling. What’s that sentiment?
The media likes to skew it so I don’t want you to put too much weight into the media like the news itself. They like to go for whatever gets people to click but listen to people. If you’re at a job, listen to your coworkers. What do they say about their 401(k)s? Listen to your neighbors and what they say. You will hear these emotions coming in. There’s between anxiety and denial. They’re a little nervous that they’ve lost some money. They’re in denial that it’s going to go lower. That’s a time that you realize it’s going to go lower. They haven’t hit the fear, panic or anger yet. Once you get to that point, it comes back.
As you go through the cycle, there’s depression, which is where you’re about to market bottom. People say, “It’s horrible. I’ve lost so much money.” They move through that cycle and then eventually things start to recover. They’re like, “Hopefully, I won’t lose more money.” It doesn’t mean that they’re thinking, “I’m going to buy right now.” They’re thinking, “I hope I don’t lose anymore.” It moves into that belief and then back to optimism again as things start to recover. That’s how those market cycles work.
I’m doing this for your education. Even trying to make long-term predictions is hard. Timing is tough to do but you can listen, keep your ear to the ground and ask what’s going on and how people are feeling. If you understand that and get that pulse, you’re going to start to notice where the opportunities can lie. With the stock market, my prediction is that it’s not done going down yet. We got plenty of room to go.
Don’t listen to those financial advisors who say, “Keep buying all the way down.” If the financial advisor is good, they would say, “Wait until there’s that anger or panic. That’s about the time you should start looking at putting more money in. Save your money. Don’t put it in now while it’s going down. Save it until it hits bottom. Buy a bunch, wait for it to rise and make a lot more money.” That’s if I were to do the stock market.
For me, I like to avoid all these bipolar emotions that you get from the stock market and all the gambling that goes on with it. I like predictability. I’ve been through hard times financially. I don’t want to have to gamble my future and my family’s hope and peace of mind on something that I have no control over. With real estate and the types of investments we talk about, I don’t have to be actively doing it. I have to watch it. I can manage it but I’m having other people do it, those that have been through multiple market cycles, at least one full cycle. Knowing what to look for and how to adjust on the fly so that you make the best dollar and opportunities but most importantly, you don’t lose money.
Nothing is guaranteed. There’s always a risk. In real estate, you could lose a lot and everything potentially. In the stock market, honestly, you are very unlikely to lose 100%. There are things like that. That’s why you need to make sure you have people you could trust and the right people that you’re investing with. Two, that you’re investing in the right things and diversifying the way that money is coming in that’s paying you consistently. You’re getting that return now. You see that benefit now, not like, “I hope and pray this works out for me.”
That’s the kind of investing I’m trying to help you understand more and more as you read these episodes. If you have questions, go to MoneyRipples.com. Reach out to us but make it a wonderful process week. Watch, keep your ears to the ground and pay attention to what’s going on. Listen for these signs and you’ll start to see and predict the market cycles like we’ve talked about in this show. Make it a great day.