Is It Profitable to Invest in the Stock Market in 2023?

Since the beginning of the year, both stocks and bonds have been in the red.

But investing in the stock market is the best option for your long-term wealth.

The recent severe turbulence shows that investors are looking for a way out of tight monetary policy that could give markets a rebound.

Inflation hurts bonds

The most common cause of poor market performance is inflation. For the bond market, the negative effect of rising prices is not surprising.

By buying a bond and holding it until maturity, the investor knows what his nominal return (= excluding inflation) will be.

But when it comes to fixed capital, that is the unknown, any price increases and erodes value (in terms of purchasing power) over time.

Under normal circumstances, the interest received makes up for this shortfall. But in recent years, bonds have traded at negligible or even negative prices.

Therefore, inflation weighs on the value of these assets, especially as central banks expect to raise their interest rates for a long time.

Therefore, all bonds are under pressure, regardless of their quality.

And the price drop is greater the longer the conditions are.

Inflation hurts equities

In normal times, stock markets are better suited to periods of high inflation.

Investors believe that companies can better adapt to such an environment by doing what they can to maintain their profit margins.

But today this dynamic is undermined. First, because the violent rise in prices primarily affects the basic commodities (energy, raw materials, etc.).

So because by raising their benchmark interest rates and withdrawing from debt markets, central banks are increasing the cost of credit and tightening access conditions.

In addition, wage pressures are real, as inflation spreads across the economy and unemployment is low.

And to make matters worse, the loss of consumer purchasing power and the high likelihood of a global recession will inevitably weigh on demand.

Therefore, it is not easy to overcome rising costs.

Still investing

While the turmoil remains strong, temporary rebounds like those we've seen before show how closely investors are scrutinizing monetary policy and ready to storm the markets at the slightest sign of policy easing.

But as we know, these moves are usually very fast, up and down, and the results of a year's investment are sometimes seen in a few sessions.

Therefore, it is better to maintain a presence in the markets. This is all the more justified as, unlike the previous correction, prices are currently carrying a range of bad news and other fears.

It is better to invest in that context than when prices do not reflect risk or bad news on the horizon.

What to do?

If you have a medium to long-term horizon, look for stock markets that have significant assets going forward (US) or trade at low prices (Japan, China, South Korea).

On the other hand, given the poor outlook, do not invest in the eurozone except in a few individual stocks.

In western bond markets, interest rates offered generally remain low, negative in real terms. But at the current level, they are much higher than in the recent past, while inflation will fall over time.

Bonds play an important diversification role, reducing the risk of the entire portfolio.

Therefore it cannot be ignored. However, stay away from corporate bonds, which are currently too risky.

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