Turbulent market conditions represent a great moneymaking opportunity for skilled traders and investors. How to take advantage of it? Are real estate and stock markets under the risk now? Let’s find out.

Warren Buffett once said – “Be fearful when others are greedy and greedy, only when others are fearful.” It sounds like an impossible task.  How should one know when to be greedy and when fearful. In fact, there are many tools that help investors to understand when to expect the turnaround of long-term cycles, global trends, etc.

Best diversification method

I believe that diversification is key to building wealth in turbulent times. However, most of the investors simply ignore this fact and stick to the most popular markets. And this is it.

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There are a few types of diversification – investing in different asset classes, individual companies, sectors, countries. The most undervalued type is diversification into different asset classes. Only a small part of investors pays attention to it. But when it comes to turbulent times, those few who follow this rule and diversify their portfolio with the wide range of asset classes, stay in the game and make money.

By asset classes I mean not only classic instruments like gold, bonds, and so on, but other commodities, like agricultural. In fact, they are more supply and demand-driven and less speculative.

Importance of liquidity

Liquidity is extremely important for investors. Investing liquidity is how easily you can turn your assets into money.  I have to say that liquidity in times when markets are booming and liquidity in tough times are two different things. It is very easy to sell your property, for example, when everyone wants to buy. But what happens if the economy turns to the downside and you didn’t notice it at the right time? In that case, the liquidity of your assets could be very, very low. For example, we have seen this happen with real estate in 2008. So, each investor has to remember about liquidity to cash out easily and switch to other markets.

Is real estate under the risk now?

Real estate is the most popular investment tool because people believe it’s really easy to own real estate and get passive income. In theory, all you have to do is find a property, get a mortgage, invest in said property, and then rent it out. This has been done by seasoned property investors for years, earning money back through rental payments. As a result, property investments are seemingly low maintenance because you do generate money without really needing to do anything or worry too much about market conditions, etc. 

But sometimes we forget about high carrying costs.  Just investors have to be sure never get overextended and can cover carrying costs if the world was to fall apart for 1-2 years. Improperly managed real estate/leverage can ruin people financially.

real estate prices fred

This chart represents a national home price index, and as you can see, the market has been in an aggressive uptrend for a long time. We might be close to the final phase of appreciation.

It’s absolutely normal for any market to have pullbacks and consolidation. But if we are active investors, we want to get the most from one market and to switch to the other markets.

The next chart is a 30 year fixed rate mortgage average in the United States. It is clearly seen that rates are in a downtrend. I have highlighted a few zones of consolidations with similar patterns. As you can see each time we saw a rise in interest rates after this pattern. Thus, it will impact the real estate market. People have less desire to borrow money and buy real estate when rates are high.

mortgage interest rates chart

And here is a really interesting chart. The number of homes available for sale has declined significantly. In other words, the investors are not willing to sell their properties right now, and the current rise of prices is caused by declining supply, not by rising demand. So here’s the question – what will happen if the economy slips? Rising supply and declining demand will cause a sharp decline in the real estate market. I’m not saying it’s going to happen this year, but it is the risk each investor has to be aware of.

Economy and stock market

There are few important economic indicators that always warn us about buying and selling opportunities in the stock market. This chart shows inflation and its relationship with recessions (gray vertical lines).

Almost every time the inflation was above five percent, we entered into a recession. And currently, we are above five percent. However, it doesn’t mean that we have to sell all our stocks right now. It’s only one of the factors. We can talk about risks for the economy and the stock market only if most of the economic indicators are negative.

consumer price index inflation chart

Another economic data to watch is the unemployment rate, which is extremely important for the stock market. And this indicator still supports the stock market.

Temporary help services Another important factor is the investor has to be aware of and monitor. You see that every time the temporary help services chart turned to the downside, we entered into recession. We are far from any negative readings, at least as of now. The situation can change.

temporary help services chart

The next chart is very important for skeptical investors. You can see the direct correlation between SP500 and temporary help services.  However, it doesn’t mean we have to follow it blindly. We need a combination of factors to talk about market topping or bottoming.

temporary help services vs stock market chart

Here is another chart that shows every time we saw a reading below 0, the market entered into recession. But the indicator is positive now.

The median household income is turning to the downside. However, we need it to fall for a longer time to consider it a negative factor. Exactly as it happened previously. The data was falling for a year or more before the recession started.

median household income usa chart

The business conditions are also positive. With all that in mind, we can conclude there is still time for the market to rally. However, there is a risk to seeing stock and real estate markets topping in the coming 2 years. Besides, the recent drop (over 50%) of Zillow stocks sends warning signals to investors.

business conditions usa chart

Are Real Estate And Stock Markets Under The Risk Now? by Inna Rosputnia

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