Are We Entering A Lost Decade?
Many experts suggest that we might have just entered a lost decade of investing, which means you might not see a positive return on your investments for the next 10 years.
During the Pandemic, Investing gained a lot of popularity and the returns went through the roof fueled by meme investing, and stimulus checks and
of course, inflation and more. The people who entered the markets during these years haven’t yet experienced a bear market, so they have become conditioned to expect the high unsustainable results they have experienced. Now that the bears seem to take over, many people are being awakened by the harsh truth that it is possible to lose money.
A lost decade is a period of stagnation or decline of the stock market and the economy for about a period of 10 years.
This is not the first time we are experiencing something like this, for example if you had invested in the S&P500 in the year 2000, you wouldn't have seen a return on your investment until 10 years later.
Stagflation
So what is stagflation?
If you didn't already get it, stagflation is the combination of the words, stagnation and inflation. So stagflation refers to slow economic growth, usually no more than 2%, and high unemployment accompanied by inflation.
Maybe you didn't quite get it, so lets look at an example.
Say you start a business and made $100 the first year, great. And the next year you made $101, this is an increase from the previous year, but the business is still said to be stagnated because it doesn't seem to grow at any significant rate.
When this happens to the economy, companies are forced to cut their employees in order to reduce costs while inflation keeps eating into the purchasing power of the company.
Stagflation is the worst of both worlds as the economy isn't growing and inflation is eating up the money.
This is thought to be impossible until the 1970s because of the Phillips curve. This states that inflation and unemployment have an inverse relationship, which means that stagflation could never occur.
While inflation can be controlled by the fed and other bodies of the economy, its extremely hard to control and get out of stagflation.
Ludicrous Valuations
In the last couple years, the fed has been pumping about $120 billion a month through stimulus and quantitative easing. At the same time the interest rates have been near zero allowing money to flow into the economy freely. This led to 80% of all circulating money be printed in the last 24 months. This gave a lot of easy money to people which fueled momentum investing which we saw in the past few months with GME and AMC short squeeze movements.
This meant that stocks were not valued at their true value and instead hyped up by the momentum investors.
But now that the fed has cooled down the money printer and starting to raise interest rates, the new momentum investors are starting to feel the consequences. As the easy money fades away, demand for products decreases which hurts company earning which in turn drives the stock down.
Geopolitical Instability
The recent instability in Europe have already shown a huge impact on commodity prices like oil and other metals. Our economies are intertwined with each other thanks to globalization which allows for free trade and a lot of other benefits, but also, when situation like the Russo-Ukrainian war occur, it has an effect on the economies of all the world economies.
This conflict will have a larger impact on global supply chains than the pandemic as important metals like platinum and nickel used in computers and cars are mainly produced in the countries in conflict.
There are even more conflicts that may arise as the Chinese a part of its constitution states that when all peaceful methods of reuniting Taiwan with china are exhausted, they are required by the law to invade Taiwan.
Panic and Exodus
Many people have started to lose hope in the stock market and cryptocurrency also has not been doing very well lately. Most Investors generally spit their investment into stocks and bonds to diversify as usually they are inversely corelated, But due to the reasons we discussed, if we go into stagflation, then bonds actual return will be negative because of the high inflation rate, and stocks are also gonna perform poorly because of the slow economic growth which results in lower earnings
What Now?
A lost decade is only a lost decade only if you make one investment and then stop. Consistency is Key especially this time and staying through and not getting out of the market might turn out better than trying to time the market, as when you try to time the market, you need to be right twice, the exit and the entry which is almost impossible to get correct.