How long will the stock market correction last?

Tired or stressed businessman sitting on walkway in panic digital stock market financial background

Tired or stressed businessman sitting on walkway in panic digital stock market financial background

Written by daniel da costa at The Motley Fool Canada

Stocks have sold off throughout the year, and for some, like tech stocks, the sell-off even dates back to the end of last year. Lately, however, the stock market sell-off has accelerated and is now down so significantly that it is in correction territory.

Any time stocks sell off, and especially so quickly, investors understandably want to know what’s going on.

And while it’s impossible to know exactly when the stock market correction might end or how bad it might get, if you can understand why the markets are selling off, you can be more confident buying in this environment at such attractive prices.

So here’s what’s hitting the markets the most, why stocks continue to lose value, and how long that might last.

Why is the stock market in correction territory?

Without a doubt, the biggest reason stocks are facing strong headwinds in this market is because of all the factors that lead to inflation.

First of all, we have tons of excess capital in the economy, especially after all the stimulus pumped into the economy over the last few years. In addition, however, significant supply chain problems also remain. And on top of it all, the war in Ukraine has exacerbated many of these problems.

Rapid inflation is extremely worrying for the economy. Fortunately, however, central banks have been keeping a close eye on inflation and are reacting quickly to cool down the economy. However, to do so, central banks are now rapidly raising interest rates, which is also hurting equities.

So, in the best case, inflation will cool down without having to raise interest rates significantly. That would be what is known as a soft landing and could allow the economy to become much healthier without first going into a significant recession.

However, although that is the best case scenario, it will be extremely difficult for central banks to achieve. And because of uncertainty about what may happen in the coming months, stocks will continue to fall until there are clear signs that inflation is slowing.

That is what caused the significant sell again earlier this month. Despite several interest rate hikes this year, inflation figures south of the border rose once again.

So as long as inflation remains high, and therefore uncertainty about the economy remains high, stocks will have a hard time bottoming out and are likely to continue to get cheaper.

Why do stocks sell during uncertainty?

When investors buy stocks, one of the most common methods of deciding whether an investment is worthwhile is to look at the potential of the company in the future and compare it to the price and value the stock offers today.

However, when you can’t accurately estimate a company’s future earnings, you naturally make the investment environment that much riskier. And when the markets are riskier, investors are understandably unwilling to pay such a high multiple to buy stocks.

As inflation, interest rates and uncertainty have increased lately, stocks in general have lost value today. That doesn’t mean his long-term potential has been affected. It just means that the value of today’s investments has fallen.

If you can find stocks and businesses you believe in and have long-term confidence in, using this selloff to invest while they’re cheap is a great opportunity. For example, right now, a high-quality stock like Aritzia it is almost 50% below its maximum.

Bottom line

Therefore, it does not necessarily matter how long the liquidation lasts. As long as you focus on finding the highest quality businesses to buy while they are on sale, you will set yourself up for significant long-term success.

And if you want to get an idea of ​​where the market is going to go in the coming months, you would look closely at the inflation numbers and of course how central banks react with their interest rate decisions.

The charge How long will the stock market correction last? first appeared in The Motley Fool Canada.

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Fool contributor Daniel Da Costa has positions at ARITZIA INC. The Motley Fool recommends ARITZIA INC.

2022

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