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Today, stock markets have seen a significant decline following the weekend. Growth, tech, and AI-related stocks have been particularly affected by this downturn. However, many top economists and investment managers continue to hold a positive outlook.
There are two main reasons behind the drop. The first reason is a less-than-ideal US Jobs report which showed a rise in unemployment from 4.1% to 4.3%. This marks the fourth consecutive month of increasing unemployment. While the consistent rise is concerning, it's worth noting that 4.3% is still relatively low compared to the historical average of 5.7% unemployment rate. If the unemployment rate continues to rise, it could have a negative impact on stocks. However, if it reaches a threshold where the US Federal Reserve decides to loosen monetary policy by potentially lowering the interest rate, a quick rebound may be possible.
The second reason is the announcement from influential investment institutions stating their skepticism about the usefulness of AI and their belief that big tech companies are misallocating capital by investing heavily in new AI infrastructure. Although this may influence short-term market trends, I personally believe that they are likely to be proven wrong in the long run.
Investing in the stock market entails a high level of fluctuation. Stocks do not offer stable daily or monthly returns and can experience significant fluctuations, such as a 20% increase or decrease within a month, or doubling or halving in value within a year. However, over many years, the average return is likely to be strong. In fact, historically, there has never been a 7-year period where stock markets have not seen an overall increase in value.
While investing may involve short-term losses, it's important to maintain a consistent level of assessment of risks and expected returns, regardless of recent market performance. For consistent monthly returns, investing in bonds may be a more suitable option, although the overall gain over several decades is likely to be lower. Historically, stocks have yielded an average of 7% real return per year, while bonds have yielded an average of 3% real return per year. Although bonds provide consistent monthly returns, it will take approximately 24 years to double the investment value, while stocks have historically doubled the value of investments every decade, with an average annual return of 7%.
Overall, despite fluctuations, long-term investment in the stock market has the potential for strong returns.