Everyone would love to know what the future of the stock market holds! It’s the dream, to be able to anticipate the next move or the move in 20 years. Which stock will be the big home run? Unfortunately, we have no way of knowing! The best we can do is anticipate different scenarios based on the information we are given. In this post, we will talk about the stock market, the future of the stock market, and more. A long list of questions will be asked and answered.What is the stock market?
The stock market is often referred to as one of the major indices that we all know so well. The Dow Jones, the S&P 500 or the Nasdaq. It’s a collective group of stocks that shape a country’s economic health. The Dow Jones Industrial Average is thought to be the major index that reflects the US economy the best however there are only 30 stocks on the Dow Jones. A better reference point would be a large index like the S&P 500.
There are a lot of different components of the stock market. From the secondary market to derivatives and everything in between. The deeper you go the more complex it gets.
It’s a place where investors and traders alike come together to exchange shares amongst themselves. Tradepro Academy will provide the most relevant update and news on trading strategies and become a successful day trader in just 90 days. Buying and selling financial assets for different purposes. The main purpose is to make a profit. Whether for themselves or for a client.
The simple breakdown of the stock market goes as follows: it’s an area where buyers and sellers exchange shares in order to move the companies’ share prices. Much like an auction house. Buyers want to buy assets at a lower price. Sellers want to sell their assets at a higher price. Realistically one gives in or they meet in the middle.
A company will list it’s shares on the exchange through an IPO (initial public offering). Where investors will purchase the company shares which allows the company to raise money to grow it’s business. These shares then enter the secondary market, where people like you and I can buy or sell these stocks. This tracks the supply and demand of shares. Supply and demand principles dictate the movement of the market. Higher demand will push prices higher, higher supply will pull prices lower.
Share buyers will offer a “bid” which is the highest amount they’re willing to pay, this is most likely lower than the “ask” the seller is willing to sell their shares for. This creates the bid/ask spread. In order for a trade to occur, the buyer and seller must meet somewhere in the middle.New stock market developments?
In recent years we have seen the growth of technology and telecommunications. Which has brought a lot to the US stock market. From the Dot.Com bubble crash in the early 2000’s to the highest growing companies and stock names in the industry. A lot has changed since the crash where any website URL, any tech company was worth extreme amounts! Companies without real purpose or anything to offer were overvalued. The companies that lived throughout that survived and a lot of them have become powerhouses in the current day and age.
We have seen tech giants take over the stock market and essentially lead the market’s overall movement. This is because a large portion of the S&P 500 is big tech. The emergence of the FAANG stocks came to be and they have dominated the market, in both market capitalization and overall influence. When the big tech stocks go up they pull indices up, when they fall, they push indices down. Overpowering the rest of the companies on the market.
The FAANG consists of Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX), and Alphabet (GOOGL). With the honorary mention of Microsoft (MSFT).
Take a look at the S&P 500 holdings.
Take a look at the Nasdaq 100 holdings.
Market Capitalization: $1.9 Trillion
Change in 2020 up to October: 49.80%
Market Capitalization: $1.46 Trillion
Change in 2020 up to October: 56.53%
Market Capitalization: $706.9 Billion
Change in 2020 up to October: 21.75%
Market Capitalization: $970.8 Billion
Change in 2020 up to October: 6.0%
Market Capitalization: $213.3 Billion
Change in 2020 up to October: 50.67%
Market Capitalization: $1.52 Trillion
Change in 2020 up to October: 28.90%
The growth of the tech sector has paved the way for a very different stock market to come. We can anticipate that this will be a huge market decision in the future. Watching the growth of these countries and the potential mergers, acquisitions, partnerships, and what not to see the innovation continue.What does the future hold for the stock market?
There is a lot to come in the market, and no one knows how and when it will come. The one thing we do know is that there will be a movement!
In theory, the stock market moves perpetually to the upside. Stocks are long forever, it just matters how fast will they grow and what some of the targets may be.
Meaning, investors and traders have to consider the short term, medium-term, and long term.
The stock market in the short term is the most volatile and hardest to anticipate. In theory, the short term is any time frame under a year. This is where day traders and swing traders thrive, more so than investors. It’s difficult to anticipate a move in a short period of time to invest in an asset.
Rather, short term traders look for price discrepancies in technical analysis and news related events to take advantage of the potential market movement. Considering we’re in the middle of a pandemic in the world, the short term outlook does not look too optimistic for a lot of reasons. There is a lot going on in the world that affects the stock market.
The short term events are:
- The presidential election in 2020.
- COVID-19, vaccine, and wave 2
- US and China Tensions
There are definitely more, however, these are the most immediate and most important factors. There is a sell-off in markets right now which could continue into the election. If this is just a correction we will see a rally into the election but that depends on news and on technicals.
Under 3220 on the S&P 500 futures market, we will see the continued sell-off that could push us to the 15% drop from all-time highs. Three green days in a row at a bottom could indicate the low is around the 10% drop or 3220.
In the medium term, the stock market is going to be very volatile and interesting. We have a pandemic to get through and a Presidential election to get through as well. The medium-term timeframe is usually denoted as 1-year to 5-years of time. In that time period, we are expecting to see an economic recovery in the US and we expect to see interest rates hold at lows for the majority of that time. If not all of it.
Should the US economy recover in that time period, we anticipated seeing the equity market rally to fresh all-time highs which would be well above 3600. This means that we will have to see the survival of COVID and the US election during a market crash year.
Should all move smoothly, we could have something of the sort in terms of market movement for the medium term timeframe:
Long-term we anticipate continued upside in the US equity market, the growth of the stock market is continuous as long as there is innovation and individual stock growth. We anticipate the upside does continue. However, it is hard to predict what the market will look in 10-years and how it will get there. It’s unlikely that we will see a straight line after the burn of the pandemic is over. The future of the market could hold many more market crashes by the time we see the S&P 500 trading in 10 years.Do you expect any changes in rules and regulations after this pandemic?
We have experienced one of the largest drops in US markets in this generation of young adults. The COVID-19 crash, which was one of the catalysts that pushed the market lower has stirred up a lot in the financial industry which begs the question is this an efficient market and will anything be done about traders and market participants in this market? We saw many different changes in recent months. From the influx of retail traders to SoftBank moving the entire tech market by itself. Which begs the question what regulations have changed? What could change?
2008/09 crash changes
Take the most recent financial crisis we have experienced, when Barack Obama was President of the US. Both Bush and Obama signed new legislation after the financial crisis to respond to what had happened. The best know is the Dodd-Frank Wall Street Reform and Consumer Protection Act. This Act is designed to protect consumers and regulate activities in the financial sector so we don’t have a repeat of what happened in 2008/2009.
The Emergency Economic Stabilization Act was put into place as well which created the TARP or Troubled Asset Relief Program. The Federal Reserve was also altered in taking up new precautionary measures in monetary policy to manage the future of the economy and the stock market a little more closely.
Rise of the retail trader
This year we saw the rise of a retail trading storm like no other. From wild success stories to crazy downfalls. The retail trader and investor took the world by storm as the US was locked down. People were staying at home because they couldn’t go to work or school, mainly young adults got into the market. The most infamous platform used out of the States is Robinhood, a free trading platform for traders mainly in the US. The chart below shows the increase of Robinhood accounts by millions of users compared to the S&P 500. Which sparked what many call the retail rally, finished off by a massive position in SoftBank.
The recent influx of retail traders has brought around the question, should there be more regulations around the ability to engage in financial markets? The platform, Robinhood like many others in the US has gone to free commissions, which means the data that is stored in this platform is being sold to third parties. Which could hold platforms like Robinhood liable. So will there be further regulations placed on retail traders and platforms like these, because should this continue the retail market could end up moving the market as a whole?
Tax implications that may arise from this
This pandemic is causing a lot of debt to flow into the government. Meaning the balance sheet by the Fed continues to grow and so does federal debt. This could mean that we may see increased tax implications which could also be based on the influx of market participants over the past year. Should market activity continue… depending on the 2020 President, the risk of increased taxes is an option?
We know that Trump is very capitalism-focused and expressing it with lower corporate taxes etc. However, with the recent accumulated debt and increased circulation of money in the free market, the government is running up quite the deficit. Meaning that personal taxes could go up. Even more detrimental to traders, we could see an increase in capital gains tax to come which would make sense with the recent influx of traders coming to the market.What is the top stock picks for the coming years?
It’s very difficult to time the market and finds companies that are guaranteed to do well in the future. Not to mention the perpetually rise. However, there are stocks that are extremely stable, innovative, and continue to produce increased revenue year after year. This is a shortlist of 3 stocks that we like to continue to grow in the future. This is an opinion, not trading or investment advice.1. Apple or Microsoft
The classic big tech names that never go out of style, have some innovation to them year over year and continue to expand and Apple and Microsoft. These stocks are mega-caps that don’t fall from heights so easily. From mergers to other streams of revenue. Apple has taken on its own hardware and software and even pushed Intel out of the picture. While Microsoft is looking to expand its market share.
These are great pickups as Apple has split multiple times over and continues to push harder. Both with market caps over $1Trillion and with a lot of upsides to come. These are bought and hold.
Amazon has ventured into the cloud space and we’ve seen an aggressive pop in the stock with a potential stock split coming up on the expensive stock that has rallied over thousands of percentage points since the 2008/09 crash and the Dot.Com bubble crash. We see AMZN continuously increasing revenue and innovating. With potential EV and their own faster delivery. AMZN will be around for a while, especially with their willingness to expand and venture into different sectors.
3. Johnson & Johnson
Johnson & Johnson is a massive company that does it all! All of the necessities that you use on a daily basis are probably JNJ! From consumer health products, medical devices to pharmaceuticals. It’s a company that has been around forever and everyone will continue to use their day to day products. They will continue to push and innovate. They have recently started to pledge nearly $1 billion dollars to create more sustainable products and services.
What do you think institutional investors are buying?
The institutional investors are buying a huge mix of assets. Interestingly enough, the world’s current biggest investor is the Federal Reserve. The Federal Reserve owns over 20,000 different assets and billions of dollars on the balance sheet. However institutional investors have to diversify their holdings. It can’t just be only tech or only financials. There is a lot of institutional flow in tech stocks!
Investors do gravitate towards assets that are performing well in the means of their asset diversification. There is a lot of money flowing into the FAANG stocks and MSFT.
Recently we did see an attempt to push into value stocks. To spread out the wealth and not solely focus on high strung tech. Tech stocks were propped up by SoftBank’s $5 billion positions which caused the broker on the other end to buy the stock. This alone pushed the stock up and caught the attention of smaller investors, traders, and a lot of retail money which dictated the recent massive flow into tech. There will forever be decent institutional investors flowing into big tech companies. Maybe not to the same degree unless there is large innovation and big revenue blowouts especially in earnings.
Take a look at tech, led by the FAANG. Everything to the left of the green rectangles was the anticipated move based on fundamentals and technicals.
Now that we see the move towards more value stocks to adjust institutional portfolios we see some money flowing out of tech in profit taking and moving into different sectors. Like financials, Bank of America and JP Morgan, etc. Consumer companies like J&J and Procter & Gamble. Telecommunications like AT&T and more. The list is endless. Companies that haven’t done as well as tech but have a lot of value.What investment strategy do you use?
I use very simple investment strategies that involve a top down analysis, mixed with technical analysis. The top down approach starts with the overall health of the economy and the market. Then we look at which stocks have the most potential. A lot being tech stocks. Diversifying my portfolio between a few main sectors and also ETF’s to grab a larger portion of the market.
I use a very general portfolio mix to make sure I get a little bit of everyday. About 60% of the portfolio is in equities (stocks), 15% in commodities, especially how gold and silver have been doing this year, and the rest of the 25% of the portfolio is in fixed income. I use the main sectors, Tech, Health, Financials and Energy as specific break down sectors. Then the rest of the sectors or whichever stocks you can think of are in the ETF portion of the portfolio.
After this has been broken down, I’ll usually gravitate towards better known stock names with larger market caps with high potential of continuing their climb. At that point I would switch to the technical aspect of the decision. Where to get in? We all know that timing the market is very hard and we want to get into the asset mixes at a similar time to keep the portfolio diversified.
I am a big fan of stocks around their 100-day and 200-day moving averages which ever one holds out well for their continued move to the upside. There is a more sophisticated way to go about a portfolio selection, such as models and more analysis. There is a lot of research that goes into this, but this is a very simple approach of building up a long term, strong portfolio.Want to learn more about futures contracts and trade them in a LIVE community? Check out TRADEPRO Academy.What trading strategy do you have planned for the future of the stock market?
When it comes to trading, TRADEPRO Academy has a large focus on the futures market. As well as a slightly longer-term approach on the options market. We do short term options positions and swing trades.
When it comes to trading futures, not much changes in the coming months, years or so on. We use price action and order flow. The only thing that changes is the market’s movement, increased volatility as we saw on the crash calls for wider stops, more breakout trades to catch the momentum. It’s difficult to be cute,call bottoms or tops in a fast moving market. Fading is a difficult craft. As the market starts to slow down and move more calmly we like to focus on pullback trades, higher probability trades that can be better times. No matter what happens, the main focus is to elevate mental strength and emotional quotient.
As the market progresses, a big part of our options strategy is looking for good longs, calls are a little easier on the mentality to scope out and it’s always hard to call a top in a bull market. As volatility increases, we are going to move more towards implied volatility strategies in the options market. This would mean that options premiums start to increase and it becomes expensive to trade options. Should another downward market wave open up, we’ll have to switch to the put side.
Retrospectively, markets are ever changing, no strategy stays the same forever. Meaning if you want to be a good and consistent trader you have to change with the market and adapt with your strategies and how you trade. For the most part the one thing that does stay the same is the technical analysis that a trader puts into their craft. Along with their emotional quotient.Do you think the future of the stock market will be manipulated?
There is a lot to be said about market manipulation, from dark pools, to spoofing and more. There will always be a hint of market manipulation, but it doesn’t mean that it’s not foreseeable by traders. Of course you can’t see every single manipulated movement, however with the right tools you can see the order flow of the market and what is really going on throughout whichever market you trade. There will always be a hint of manipulation, which is going to continue. Careful in the markets and focus on your education.What are the main forces affecting the future of the stock market?
There are a lot of driving forces that dictate the market’s movement. To break it down in easy terms, the main influences you should keep an eye and ear on are: Political influencer (US President), the Federal Reserve, institutional money flow and as of late, the retail crowd. There are a lot of retail traders that have entered the stock market this year alone after everyone was forced to stay home.
The abovement mentioned is a hierarchy of influence on the market. The President or political figures affect the economy and dictate at least to some degree where the Federal Reserve will take the market, especially in the sense of Jerome Powell and Donald Trump. The Federal Reserve then breaks down the monetary policy and forecasts what the economy will look in the future and adjusts the monetary policy based on how it unravels.
Which then affects institutional investor decisions. For example, if rates drop, then investors can borrow money for cheap and invest in the market where they’ll earn higher returns. This causes markets to move up. The investors decision is very reliant on the monetary policy and what the Fed says. There is a lot of money supplied right now and the institutional investors love it.
Finally this trickles down to the retail level where we have recently seen in 2020 that an influx of many retail traders. According to Citadel, the retail trader now makes up about 25% of the market. Meaning they influence the market just like other investors and institutions! Should there be a “retail” stock it gets moved by retail traders. A lot of the rally was helped by the retail trader.
Meaning you should keep an eye on all of these moving parts in the future. It seems unlikely that the retail trader will disappear after we see the end of COVID. A lot of people have found employment through the market.Bonus: Trading and investing tips the market during the pandemic?
To wrap this up, a few tips to get you through the election and the pandemic. The number one thing to do when becoming a successful trader is to build your emotional quotient and your mentality. You want to become mentally resilient so you can focus 100% on the market when you are trading. This is in order to make the right decisions from the information you are provided.
The next aspect, if you are trading, take whatever opportunity you are given, do not force your trades, and stick to your plan.
For investing, have a plan, just like if you were trading. Stick to that plan, make sure you get into your trades and investment to plan and make sure you don’t get scared out! Take “nibbling” positions, don’t use all of your capital on 1 a trade or 1 stock, split it up effectively, and make the money work for you. Buy into stocks at different levels rather than all at once!Do you want to learn more about these strategies? TRADEPRO Academy has a FREE webinar (just for you).