Blood In The Stock Markets - How Much Longer Will It Flow And What To Do As A Retail Investor?

(MENAFN- Investor Ideas) Investorideas, rated as a top 100 investment website for investment issues market commentary from Hani Abuagla Senior Market Analyst at XTB MENA

Stock market declines in recent days are something investors are definitely not used to. Especially those who entered the market last year when, with a few exceptions, there were no significant declines. The year 2024 is already in the past, as are the gains the S&P 500 stock index made last year. What to do from a retail investor's perspective in today's turbulent times?

First and foremost, keeping a cool head is in order. Calm during a stock market storm is a key asset for any long-term investor. Taking systematic and unhurried action is the cornerstone of success. After all, we don't take profits furiously during times of extreme market growth either. In addition to calmness in investment actions, risk management is also important. For the long-term investor, the use of stop loss orders may be an unnecessary addition, but risk can also be managed through determining exposure to stock types or asset types in general. The current market environment is not conducive to technology and growth companies. Thus, one way for retail investors is to buy dividend paying companies or diversify the portfolio into bonds. However, with the decline in equities, we are now seeing a decline in bond yields. Investors can therefore buy these instruments used to hedge portfolios at higher prices. Paradoxically, gold, which normally enjoys similar situations, is also starting to correct. I think that this precious metal could also find a place in many portfolios.

After the big sell-offs, the other extreme is investors' over-eagerness to buy carved-out technology companies. No one can tell where stocks will be in a few hours, let alone days or weeks. Investors should thus approach the current situation with the knowledge that the markets may fall even further and should make any purchases gradually. In the short term, it certainly does not pay to invest any excess cash in equities right away. On the other hand, we would not historically find a 20-year period at the end of which stocks were lower than at the beginning. This opens buying opportunities for stock ETF investors, but I advise caution here as well.

The basic market scenario, and the most pessimistic scenario for investors, is probably a recession in the US, which could spill over into Europe or China. However, one statement from Donald Trump can give the markets a growth boost. If we expect what the market is counting on, we need to prepare for a weak performance of the US economy due to household savings. This will mainly affect companies in the cyclical consumption sector, the so-called consumer discretionary. If consumers cut back, the first of the costs that companies will cut will be marketing and advertising, which will negatively affect large technology companies. The imaginary house of cards may then be knocked down by lower spending on artificial intelligence by technology firms.

The most optimistic scenario, which the market is not yet thinking about, is the abolition of tariffs and a return to pre-election "normalcy". However, this scenario is not very likely, as Donald Trump wants to carry out his policies in spite of the market. Moreover, the currently weak dollar not only helps him to support exporters, but also lower market interest rates allow the US government to issue bonds with lower coupons.

The most realistic scenario is stagflation in the US. Higher inflation, unemployment and weaker economic growth is probably the ideal scenario in today's market environment. Should this scenario occur, and the US avoids a recession, consumer sector firms will suffer similarly to the recession scenario. Conversely, dividend-paying firms in the consumer staples sector or energy firms, or firms in the utilities sector, the so-called Utilities sector, could generally prosper.

Donald Trump's policies, at least so far, do not suggest room for technology firms to grow as they did last year. The change at the geopolitical level is also a change in the behaviour of investors in the stock markets. At least in the short term, we will no longer see a moment when investors in equity ETFs deliver higher returns. Instead, a more active approach and portfolio management is coming to the forefront and may deliver higher returns than the overall market in the months ahead.

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