Topic: How To Invest

When will the stock market recover fully? Consider hormesis to see why we’re optimistic on the outlook for the economy and the stock market

When will the stock market recover fully? There’s a term from the field of biology that may explain why we’re optimistic about the timeline for a rebound.

When will the stock market recover fully? Let’s consider “hormesis.” The first time I came across the term hormesis was in connection with a study of 180 apartment buildings with a total of 1,700 units, built in Taiwan in 1983. The girders that held these buildings together were made of recycled steel that was contaminated with discarded cobalt-60, a radioactive nuclear power by-product. Ten thousand people lived in the apartments, for periods of nine to 22 years.

The U.S. NIH (National Institutes of Health) reported on a 1990s study of the cancer rate of these people. Rather than the expected high rate, the study found that death from cancer in this group was greatly below average—just 3% of the rate of the general Taiwanese public. In addition, congenital malformations (serious birth defects) were greatly reduced as well, to about 7% of the local average.

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“Hormesis” refers to a beneficial biological effect (such as improved health, better stress tolerance, faster growth or longer life) that comes from low doses of an agent that is toxic if not deadly when taken in higher doses. This “hormetic factor” basically means that while too much stress is bad for your health, low amounts of certain stresses can be good for you.

I bring this up now because I suspect the hormetic factor will have a beneficial impact on the market outlook, and on the performance of your investment portfolio in the rest of the year and beyond.

The hormetic factor may play part in answering the question, “When will the stock market recover fully?”

Like past recessions, this current COVID-19-induced one brought losses for most people, especially those on the lowest rungs of the income ladder. In assessing the future of this recession, many commentators assume it will follow the lead of past recessions and drag on for a long time.

Past recessions were caused by a natural process, however. This one was deliberate.

In past recessions, businesses and governments made a convoluted mess of poor economic and financial decisions over a period of time. This created deep, economy-wide imbalances. The situation could only be corrected by re-financing or shutting down numerous enterprises that were losing money and unable to pay their debts. When this backlog of inevitable business failures dries up, the economy turns the corner and business conditions gradually improve.

This recession was created deliberately, by government decrees aimed at fighting the coronavirus. The recession hit hard and fast since governments acted virtually overnight, and were erring on the side of caution, and closing all businesses they deemed non-essential. Now they have begun re-opening their economies to see what happens.

Past recessions came about due to relatively slow-moving, natural processes, so it took time for the economy to recover. This one came about due to sudden government shutdown decrees. Some subjects of these decrees will be hobbled for months or years; others will never recover. But a majority may get back up to speed soon after the lifting of the shutdown decrees.

No one can predict the future, of course. I suspect this recovery will go faster and more smoothly than recovery from past recessions. That’s why I feel more optimistic on the economy and the stock market than anybody I know.

These four key points will help you build a portfolio with maximum recovery potential

It’s essential to diversify, as you do if you are investing your money with our three-pronged investment approach of investing in well-established companies, spreading your investments across most if not all of the five economic sectors and avoiding stocks in the broker/media limelight.

In addition, successful investors need to limit their involvement in trouble-prone areas like new issues, start-up companies and illiquid investments.

They need to stay out of companies in which they have doubts of any sort about the integrity of insiders.

They also need to recognize the special risks of investing in fashionable or excessively popular minefields, such as Internet stocks in the late 1990s, or income trusts in the 2000s, or social media stars.

In fact, you could sum up the basics of successful investing quite simply in four key points:

  • Don’t depend on luck to make money for you or to prevent losses.
  • Be skeptical of the claims and recommendations of brokers, promoters or anybody else with a vested interest in a particular investment.
  • Don’t do anything stupid.
  • Win by not losing.

When will the stock market recover fully? Use our three-part Successful Investor approach to hold the stocks that will bounce back fastest

  1. Hold mostly high-quality, dividend-paying stocks.
  2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
  3. Downplay or stay out of stocks in the broker/media limelight.

When do you think the stock market will recover fully? Will it happen much quicker than it has in the past after recessions?

What steps did you take to protect your investment portfolio when the market crashed?


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