Stanley Druckenmiller is a well-known investor and hedge fund manager. He worked for George Soros and is known for his successful track record in investing and making big trades. Following successful traders and understanding how they think can help you grow wealthier. You can check
top FX traders listed here for more information.
In May 2021, Druckenmiller predicted that the stock market would be “flat” for a long period of time. "There's a high probability in my mind that the market, at best, is going to be kind of flat for 10 years, sort of like this '66 to '82 time period," said Druckenmiller.
He named factors such as high inflation, and increasing interest rates. The main purpose of central banks is to control inflation. When inflation is too high, banks increase interest rates. Raising interest rates limit money supply in the market. When interests are increased individuals and businesses take less loans, less money gets printed and consequently inflation decreases. On the other hand, less money in the economy shrinks companies. Consumers have less money to spend, and this means less income for businesses. In addition, there is less free capital available for investing in the stock market.
High interest rates solve the inflation problem short term but hurt the economy for the long run. Which is why central banks use it as the last resort for controlling inflation.
Druckemiller’s prediction was probably also influenced by the Covid-19 pandemic. Governments globally took huge loans in an attempt to fight the challenge and improve healthcare. Which in turn has contributed to global inflation.
Since the global financial crisis in 2008, central banks have also implemented generally loose monetary policies to promote growth, but they are gradually tightening their stance.
Since this prediction was made, many other events have occurred that further increased the probability of ranging stock market conditions. The Russian invasion of Ukraine has caused food shortages around the world. Both Russia and Ukraine are massive producers of grain and other major commodities such as oil, gas, and metals. In addition, prices on rent and housing have also gone up.
Is the flat market prediction coming true?
To answer this question, we can take a look at the S&P 500 chart. The S&P 500 is a stock market index that tracks the performance of the top 500 companies listed in New York and NASDAQ exchanges. American exchanges are the most attractive to both investors and speculators because liquidity is high, markets are highly transparent and spreads are low. This index is considered to be a broad measure of the overall health and performance of the U.S. equity market.
As you can see, the market has been in a range for the last few years. It is possible this trend will continue as Drunkenmiller has predicted.
It should be mentioned that it doesn’t mean all stocks are traded in a range. There are many companies that manage to increase their market capitalization dramatically. Finding and investing in such companies is the main goal of most investors. You can check the
biggest stock gainers in history here.
What are the alternatives to stock trading?
Speculating with asset prices can be profitable in various market conditions, such as rising, falling, and ranging markets. However, investors that are looking for ways to invest passively need markets that increase in value gradually. For investment to make sense, average returns should be higher than the inflation rates. There are several alternatives to stock trading, including:
● Bonds: bonds are fixed-income investments that pay interest to the investor. Bonds are debt securities, and typically governments and big companies issue them. It should be mentioned that the U.S. government bonds are considered to be low risk investments, and as a result, pay less interest. In investing, higher the risk, higher the potential returns, and similarly, low risks are associated with lower potential returns.
● Mutual Funds: Mutual Funds are investment vehicles that collect money from investors to purchase securities. Typically, mutual fund managers diversify their portfolios to limit their risks.
● Exchange-Traded Funds (ETFs): ETFs are very similar to mutual funds but are traded similar to company stocks on exchanges. ETFs provide exposure to a diversified portfolio of assets, making them an attractive choice for investors that want to invest in a certain market segment.
● Commodities: commodities are raw materials such as precious metals, energies, and agricultural products. Commodity prices usually increase during inflation. Precious metals such as gold and silver are viewed as a hedge against inflation.
● Cryptocurrencies: investing in crypto coins and crypto derivatives is a great way to diversify your portfolio. Coins such as Bitcoin, Ethereum, and others are highly volatile and offer good potential for growth over a long period of time.
● Trading currencies: currency trading is more speculative activity than investing. Brokers offer a wide range of available leverage, and ability to go long or short. Currency markets are the most liquid and as a result offer tight spreads.
● Real estate: Real estate investments include rental properties, real estate investment trusts (REITs), and real estate crowdfunding platforms. Prices on real estate are largely immune to inflation
Main takeaways
To sum everything up, In May 2021, Druckenmiller predicted that the stock market would be “flat” for a long period of time. The main reason was high interest rates and increased inflation. Covid pandemic, food shortages, and war in Ukraine contribute to global price hikes on goods and services. And if we take a look at the S&P 500, Druckenmiller’s prediction is coming true. There are various alternatives to Stock investing, including: bonds, mutual funds, Exchange traded funds (ETFs), commodities, cryptocurrencies, Forex, and real estate.
