If we had asked this question earlier this year, the answer would’ve definitely been the U.S. Dollar. We all saw how the USD kept strengthening every time the Federal Reserve raised rates, while other investment instruments fell in value like gold, equities, & other currencies.
But now, with U.S. inflation starting to peak & show signs of slowing down (although not going down), we can imagine we’re also reaching the peak of interest rate hikes by the Fed. After the Fed has stopped hiking rates it’s expected to leave them unchanged for a few months, before it starts bringing them down again – bringing markets to their glory days.
The above suggests that the USD’s rise could begin to reverse now, & that gold & equities are in a bottom with no signs of bouncing back up soon.
But since Thndr doesn’t offer investing in gold (yet at least), I won’t talk about it. So let me dive into strategies for entering the stock market now amidst the current macro environment, & what stock characteristics could suggest bigger returns in the coming period.
The smart investor is one who has stayed on the sidelines of the stock market for the past 10 months, specifically when the Federal Reserve first announced it would hike rates significantly, & is now preparing to enter the market & buy at low prices.
But still, entering the market must come with a strategy. I prefer entering gradually & over phases, as there is always downside risk even when the market seems to have hit such low levels. I also strongly emphasize diversification, as you should never go in on one security with all your capital, no matter how confident you are of it. Finally, keep 20% of your portfolio in cash.
Stock characteristics with a higher likelihood of yielding higher returns
- Stocks that fell the most will rise the most, given there are no worrying signs in the company’s financial performance
- Start with blue-chip stocks, then move on to more volatile stocks as the market stabilizes
- Enter sectors with less risk until you have confirmed the market is in an uptrend, then you can venture into riskier sectors
- While most stocks rise during bull runs, don’t rely too much on that. Make sure you pick your stocks carefully & look at ratios like price-to-earnings or earnings-per-share. It doesn’t make sense to buy a stock with a 10x P/E when the market’s P/E is 4x, for example.
- In the EGX, it’s preferable to pick companies with export operations, as revenues come in foreign currency, protecting them from exchange rate fluctuations.
Bottom line
I don’t think now is the best time for short-term trading. I think people with the highest returns will be those who hold these stocks for 1-2 years when the Fed starts to lower interest rates. And like Warren Buffet said, “Be greedy when others are fearful, be fearful when others are greedy.”
* This article was not written by Thndr and does not constitute investment advice. You should do your own research before making investment decisions.
