Has the stock market bottomed out? Here’s a better question to ask.

After the stock market experienced its worst year since 2008 last year, there is one question on most investors’ minds: Has the stock market bottomed out yet?

It’s easy to see why investors would want to know. After an epic rise from the bottom of the pandemic in March 2020 sent inventories soaring, the Alcohol market That started last year killing the party. Extended valuations in the technology sector and high inflation set the market for a pullback as the Federal Reserve raised interest rates to control inflation. Rising interest rates lowered valuations in the stock market and encouraged investors to move money into the bond market as Treasury yields exceeded 4%.

last year , Standard & Poor’s 500 (^ GSPC 1.89%) decreased 19%. From peak to trough, the index saw an even larger decline of 28%, although it has already rebounded from the lows seen in October with a gain of 11%. Even with this bounce, it’s easy to see why investors want to know whether or not the market has bottomed out.

Most economists still expect a recession in 2023, and it is estimated that corporate profits fell in the fourth quarter (earnings season has just begun). In addition to this uncertain outlook, there is another reason for investors to worry about the bottom of the market. This is loss aversion, a psychological concept which means that investors would rather avoid losses than make gains of the same size. In fact, according to research, the psychological impact of losses is twice as high as gains. Thus, investing in a bear market means risking losses and experiencing loss aversion in a way that it does not happen when investing during a bull market.

Of course, every investor would like to be able to time the market, but it’s impossible to do so consistently, and top investors like Warren Buffett don’t waste their time or energy trying to do so.

An investor sits at a desk in front of several charts.

Image source: Getty Images.

Better question to ask

Rather than wondering if the market has bottomed out, or trying to pinpoint when it will happen, investors are better off reconsidering their investment goals. This means asking yourself what your time horizon is and what you are investing in.

If you are investing for retirement after at least several years, it is best to ignore market fluctuations and continue to invest at regular intervals. After all, if you’re saving for retirement, you’re a net buyer of stocks, and you should remember that market pullbacks are actually good for net buyers of stocks because they make stocks cheaper.

If you’re reluctant to buy stocks in a downturn, it’s also worth remembering that missing out on a rebound can be a much bigger mistake than investing before the market went down.

How to protect yourself from downturn

On the other hand, if you have a shorter time horizon, or you’re already in retirement and living off your savings, you might want to consider investing in lower-risk assets like dividend-paying stocks and bonds. These options will do a better job of protecting your wealth from a sell-off.

Investors concerned about the direction of the market should pay attention to macroeconomic data on inflation and interest rates. The market’s sell-off in the past year was mainly driven by the Federal Reserve’s decision to raise interest rates to rein in inflation, and the market generally expects stocks to recover as inflation falls and the Fed stops raising interest rates.

When that happens will be determined by a a variety of factors, including the inflation rate and market-based interest rates such as Treasury bills and mortgages, as well as general economic data on the labor market, retail sales, and GDP. In addition, earnings results and guidance will also affect the market trend.

The good news is that inflation is starting to decline, and there are other signs that the economy may be experiencing a “soft landing.” Ultimately, no one knows for sure if the stock market bottomed, but most investors are best off ignoring this question and preparing for the recovery by taking advantage of the sell-off.

Jeremy Bowman He has no position in any of the aforementioned shares. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a Disclosure policy.

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