Since 1980, the US stock market has experienced one of its most significant intra-year drops, falling 25% in the year’s first nine months. Although the intra-year fall in 2008, which was 38%, was an indication of the global financial crisis, this is still less than that. A 49% cut was made at year’s end.

This graph displays both the market’s annual return  (gray bar) and intra-year stock market falls (red dot and number). This chart demonstrates that the market may bounce back from intra-year declines and end the year in positive or only mildly negative territory, which could compel investors to stick with their positions when markets become bumpy.

So what are the factors that may impact your decision to invest in US stock market now? If you ask yourself, “Can I invest in US stock market from India?”, here is everything you need to know. 

• Inflation data in the US

Both overall and core inflation are significantly higher than long-term norms, which will drive the Fed to raise interest rates.

The ongoing supply chain issue and the conflict in Russia and Ukraine are significant contributors to the current high level of inflation, pushing up food and energy costs. For example, inflation in the United Kingdom just reached double digits for the very first time in forty years, and it is predicted to reach 15% by 2023. In the same way, inflation in the United States reached a 40-year high in 2022, peaking at 9.1%. As a result, budgets for individual households are being squeezed, consumer confidence is being impacted, and the cost of living is rising.

• Strong Unemployment Rate and Wage growth

Recession is a threat to the economy in the coming year, but one has yet to materialize due to the exceptional excess demand in the labor market. Despite a recent minor easing, there are still almost two job opportunities for every unemployed person. Due to the competitive labor market and employers’ efforts to keep their current employees, the number of workers quitting their jobs has increased while the number of layoffs has decreased. In the US, the unemployment rate and pay growth are both high relative to historical data. This could increase inflation.

• Fed Rate Hikes

The Fed has changed its attitude to substantially more hawkish due to the year’s first half’s upside surprises in inflation and a solid job market. As a result, the Federal Reserve raised the federal funds rate by 0.75% for a third time during its September meeting, following hikes of 0.25% and 0.50% in March and May, respectively. Due to all this, the critical rate now ranges from 3.00% to 3.25%.

Notably, the Fed predicts inflation will decrease over the coming years and reach its 2% target. It is uncommon for the unemployment rate to increase only slightly during an economic downturn, and a recession could cause it to increase. 

The risk that an overly aggressive Fed could send the economy into a recession is reflected in the futures markets’ expectation that the Fed will ease policy starting in the spring of next year, even though they currently roughly concur with the Fed’s forecasts for the federal funds rate for the remainder of 2022.

• Value vs Growth – Value stocks favoured during a recession

Value stocks have higher dividend yields than growth companies, are now trading at a discount to long-term averages, and may have less room to correct during a recession.

Tesla is a prime example of a thematic premium to growth stocks. According to company-released figures, Tesla will account for less than 2% of developed world auto sales in 2021, but its market capitalization has surpassed that of all other worldwide automakers combined.

Another example is Meta (Facebook), which has dropped by a third since issuing massive earnings warnings in early February. Despite earnings downgrades of 15% to 20% for the upcoming year, no earnings growth predicted for the following two years, and the possibility that users and earnings have already peaked, it is still among the top 10 largest corporations worldwide by market capitalization.

How to Invest in US Stock Market During a Recession?

Anyone can become anxious when markets are volatile. If you want to invest in US stock market, you should be aware of the following factors. Volatility spikes in the market are problematic but common aspects of long-term investing. You should prepare for market drops throughout your investing career; they are not enjoyable.

• Avoid the temptation to sell based only on recent market fluctuations. When markets decline, selling equities might make recent losses permanent. Even though it’s emotionally challenging, sticking with it could be better for your portfolio. This does not imply that you should cling on tenaciously, but rather that you should avoid being swayed by noise and anxiety and instead consider an investment’s potential for growth and its place in your portfolio.
• Think long-term. Markets often suffer ups and downs, and throughout a lengthy investment career, you’re likely to witness several sizable falls. However, even bear markets—i.e., those where the market plummeted by more than 20%—have traditionally been shorter than bull markets. All investors would be wise to ignore the hubbub and remain focused on the plans because it is practically difficult to time the ups and downs of the market.
• Review your risk capacity and risk tolerance. Market declines may nudge you to reevaluate your risk tolerance, but we advise delaying until you are calm. However, risk tolerance can—and ought to—be considered at any time. Have you got enough money to accomplish short-term objectives? The ideal place to put money that you’ll need soon or can’t afford to lose in relatively stable assets like money market funds, Treasury bills, or certificates of deposit. When the stock markets are volatile, having your next year’s worth of living costs in a money market fund or a bank account, together with a few more years worth in securities that mature when you need the money, can help retirees maintain their composure.
• Ensure that your portfolio is diversified. Volatile markets might also show that portfolios that their owners believed to be adequately diversified aren’t. It would be a good idea to get acquainted with your portfolio again if you haven’t previously done so to confirm that you understand how every asset class is performing and that the mix complies with your desired asset allocation. 
• Think about including defensive asset classes for more stability. When stocks are down, defensive assets like cash equivalents and cash, Treasury securities, and other US government bonds can help keep a portfolio steady. Additionally, it’s a good idea to maintain your money in assets that historically have been less volatile and liquid than stocks, such as short-term bonds and cash, if you anticipate spending from your portfolio in the coming years. This may spare you from having to sell during a market downturn.
• Rebalance your portfolio as necessary. Market fluctuations may cause your allocation to deviate from your initial plan. Over time, the assets in your portfolio that have appreciated in value will make up more of it, while the ones that have decreased in value will make up less. Rebalancing entails selling investments out of proportion with the rest of your portfolio and allocating the profits to underweight ones. You should carry out this task periodically. The inverse of purchasing stocks to rebalance after a selloff is the requirement to sell them after a strong recession market drives those allocations much higher. This tends to enforce a systematic, as opposed to speculative, sell-high and buy-low discipline on your assets.
• Adapt you’re investing to fast-moving markets. Consider current circumstances before placing orders if you must trade during erratic market conditions. For example, trading at the start and ending hours of the session, which can be the most volatile, should be done with caution. Instead, trade smaller positions and consider “scaling” in or out of positions by purchasing or dumping stock in blips as the price changes. In addition, you can implement protective measures, such as stop-limit orders and stop orders, to safeguard an unrealized gain or restrict possible losses on an existing position. These can assist in making your decision-making less dependent and more automatic in acting morally under pressure.

The Bottom Line

So, are you planning to invest in US stock market from India? Stockal has several ETFs covering US indices which would offer diversification benefits because US markets are nearly at pre-covid levels despite a good performance from the economy. Trading is hassle-free and quick on Stockal, with all the necessary resources that you require as you begin to invest in US stock market from India.