The stock market has been on a wild ride in 2020, with the Dow Jones and other indexes taking some huge hits when news is discouraging and seeing “ever-higher” peaks when news has been positive.
Given the unprecedented nature of the year, it can be understandable that investors may be hesitant to jump in and buy stocks right now. But there are a few things that they should consider before they decide, and this article will cover those points in detail.
Why the Stock Market Is Booming Despite Several Headwinds
It may seem counterintuitive for the stock market to be booming when the world has been battling a pandemic that does not yet have a definitive end in sight. After all, the coronavirus has caused many business to close temporarily, or to go out of business altogether.
However, there are several forces at work that have pushed the stock market higher. The three key catalysts for the market’s rally have been:
• Stimulus measures: Initially, the huge injection of stimulus money from the government and Federal Reserve helped to ease the pain from the pandemic’s economic impact. Additionally, the promise of additional stimulus measures, such as an extension of federal unemployment benefits, is likely to lend further support to stocks.
• U.S.-China trade war easing: As the U.S.-China trade war cooled off, there was an increase in Chinese imports, which helped to drive demand in key U.S. markets such as machinery, medical equipment, and other manufactured goods.
• Monetary stimulus: The Federal Reserve has cut interest rates to nearly zero, which has made it cheaper for companies to borrow money which can then be used to reinvest in their businesses or stocks.
These three factors have been key in driving the market higher and should be taken into account when deciding to buy stocks.
A Balanced Approach Is Needed
When it comes to investing, it’s always wise to take a balanced approach. This means taking into account factors such as your risk-tolerance level and time horizon. For example, if you don’t want to take on too much risk, investing in stocks may not be the best option for you. Conversely, if you are looking for long-term growth, stocks may be the best option for you.
Additionally, it is important to diversify your portfolio amongst different asset classes and stock sectors. This will help to spread out your risk and avoid any portfolio-destroying scenarios.
Finally, investors should remember to focus on the fundamentals when selecting stocks to buy. This means assessing the company’s financial health, growth prospects, and competitive position in the marketplace.
Benefits of Buying Stocks Now
One of the main benefits of buying stocks now is that they are relatively inexpensive. As mentioned earlier, the economic impact of the pandemic has pushed stock prices lower than they otherwise would be.
Furthermore, the cheap borrowing cost made possible by the Fed rate cut means that companies may be able to take on more debt, which in turn can be reinvested in their businesses. This sentiment has been echoed by many prominent investors and Wall Street analysts.
Finally, investors should also consider the idea of “buying the dip,” which means buying stocks when they are trading near their lows. This way, you can capitalize on any potential upside when the stock finally rebounds.
Risks of Buying Stocks Now
The most obvious risk of buying stocks now is that the pandemic is still ongoing. There is no telling how long it will last, or when a vaccine might be available. This means that the stock market could continue to plummet if the news of the pandemic worsens.
Furthermore, investors should also consider the fact that many stocks have been overvalued due to the Fed’s market interventions. This means that stocks may be trading at levels that don’t fully reflect their true fundamental value.
Finally, it is important to note that the stock market can be a volatile and unpredictable place. This is why investors should focus on the fundamentals and diversify their portfolios when considering whether or not to buy stocks.
Given the current market conditions and economic uncertainty, it is understandable why investors may be hesitant to buy stocks right now. However, there are a few factors at work that may make it enticing.
On one hand, stocks are relatively inexpensive, borrowing costs are low, and it may be possible to capitalize on potential rebounds if you buy the dip. On the other hand, the pandemic is still ongoing, stocks could be overvalued, and the stock market is inherently volatile.
Ultimately, it is up to the individual investor to weigh the pros and cons and decide if stocks are right for them. However, it is recommended that they take a balanced approach, focus on the fundamentals, and diversify across different asset classes and stock sectors.
Investors should be mindful of the risks involved when considering whether or not to buy stocks now. While there are some potential benefits, there are also potential pitfalls that must be considered. Hence, the decision ultimately lies with the individual investor.