Down 19%, is it safe to invest in the stock market now?

As measured by Vanguard Total stock market index ETFThe US stock market is currently around 19.4% below its recent highs. This is still in the vicinity of a bear market, and there are plenty of reasons to be nervous. In particular, with the Federal Reserve explaining it We will not stop raising interest rates until inflation is under controlThe downward pressure on stocks may continue.

This raises a major question: Is it safe to invest in the stock market now? Well, the direct answer to this question is number. of course it is Start Safe to invest in the stock market. Your money is always at risk in the market. As a result, the better question to ask is whether the bear market has opened up opportunities where the potential rewards are worth the risk. Through this lens, there may be a path to where it might make sense to consider investing again.

People looking at the graph pointing down.

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See where the fear is evident

In an environment of rising prices, some of the industries hardest hit are those that rely heavily on customers who need to borrow money to make their purchases. For example, file S&P Homebuilders Index It is much worse than the market as a whole as people fear that higher prices and a tighter economy will prevent people from buying new homes.

While it’s absolutely true that higher rates are making it more difficult for people to buy homes, it’s also true that permits to build new homes remain a bit stronger than they were this time last year. While home building and home buying slows down, we’re letting go of what’s going on too It was an incredible home bubbleAnd one in which demand far exceeded supply.

There is a wide gap between massive boom and complete collapse, and contrary to popular belief, people are still buying homes. It’s not as fast as it was during the heyday of the low interest rate that fueled the real estate frenzy. The question you should really ask yourself is whether the perceived fear in the market surrounding home builders has made at least some of them available at a bargain price.

On a related note, higher interest rates mean that companies doing business Lending Money has the opportunity to earn more lending. For example, even with the cost of consumers borrow The interest rates that banks pay on savings are still stubbornly low. Even so-called “high-yield” savings accounts barely pay more than 2%, even with 30-year mortgage rates rising to about 5.66%.

One of the main ways that banks make their money is the difference between the rate they pay depositors and the rate they lend to borrowers. The higher the interest rates, the higher the potential space in this spread, which could eventually translate into higher profits for them.

Of course, the danger is that if too many people default on their loans, the banks won’t be able to collect enough of their loans to cover their costs in full. If the economy remains weak and job losses begin to rise, those risks could be amplified. So while bank stocks go down, at least some The concern is justified by the possibility of things going from bad to worse.

Are the risks and potential rewards balanced?

Neither home builders nor banks are considered risk-free investments, but both have seen their stock prices fall overall as the market begins to learn about the risks that both sectors face. As a result, investors who buy today have value better Profile of the potential return for the risk they take from those who bought early when prices are higher.

Is the balance skewed enough in favor of the investors to where they are worth buying? The answer is a little more difficult, but you can usually get into the playing field. One great way to do this is to use an extension Discounted cash flow model To help you evaluate any stocks you are considering buying. With this model, you can get a good handle on both the cash you expect the company to generate and what that cash is worth to you.

If the stock price seems cheap relative to the value suggested by the company’s cash-generating capabilities, the risk-reward balance may be in your favour. Even better, because you’ve built a model based on a forecast of cash the company is expected to generate in the future, you can use this model to check the company as time progresses. It can help you keep an eye on any stocks you buy to see if their business is really worth holding.

let’s start

While bear markets often provide opportunities to buy large companies at bargain prices, it is likely that market panics will not last forever. Make today the day you start looking for deals. Once you find and buy it, be patient to let the market work through the rest of his concerns. Do it successfully, and you may discover that although it is not safe to invest in the stock market now, it can turn out to be very profitable.

Chuck Salita He has no position in any of the mentioned shares. Motley Fool has positions in and recommends a Vanguard Total Stock Market ETF. Motley Fool owns a profile Disclosure Policy.

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