Successful options trading requires an accurate sense of where the market is going both in the short term and over the long haul. A good example was at the start of the Covid pandemic when many believed that the new “flu” was not going to have any significant effect on society or the markets. As the market fell, many of those folks jumped into upticks in the market expecting to be rewarded and ended up being wiped out. At Top Gun Options we repeatedly warned not to buy at those times and, in fact, to place trades that would be rewarded was the market continued its decline. Then, when the Fed stepped in and flooded the market and economy with money we pivoted and essentially printed money both as the market fell and as it rose. A key factor was having a clear sense of where the market was headed and why. The same applies to where the market is headed next. What do the next five years have in store for the market?
Where Will the Market Be in One to Five Years?
Bloomberg interviewed three money managers with $2 trillion under management. The general consensus is that a deep recession is quite possible, changes in the labor market will have lasting effects on stocks, and the route to reliable sources of renewable energy will offer opportunities and present pitfalls. Two genuine concerns are the degree to which the government is willing and able to flood the markets and economy with money and the extent to which those actions can cause entrenched inflation like we are seeing today. Investors and traders who bet too heavily on the possibility of a soft economic landing as the Fed slows their interest rate increases are likely to be disappointed and could possibly lose heavily.
Labor Issues and the Economy
Labor shortages have been part of the problem with inflation as companies have had to bid up their wages in order to steal workers from competitors. There would be less of an issue with labor shortages, at least for lower paying jobs, if the US were to resolve its immigration issues but politics may not allow that. The US spends less that Germany in retraining its workers (a third as much) and significantly less than Denmark (a twentieth as much. The extent to which the US can find or retrain workers for jobs with higher skills may have a huge effect on our ability to bring critical industries back onshore. Going forward it is likely that companies will need to pay more to hire and retrain workers and that will affect their profitability.
Investment Opportunities and Pitfalls in Renewable Energy
It would appear that climate-related issues like monster hurricanes, floods, droughts, and tornadoes will be increasing problems going forward. This will affect where people live and business operate. The move toward renewable energy will continue and will require massive infrastructure changes to support it. Not all businesses in this sector will thrive as technology provides opportunities in one area and erases them in others. A major issue will be finding, extracting, and refining strategic minerals and metals needed for this new economy. Processing of things like lithium into batteries will need to move into the US, Europe, and allied nations and out of China in order to avoid supply chain bottlenecks and cutoffs in the event of hostilities. A practical part of this equation is that a facility such as a copper mine takes about 16 years from discovery of the ore to actual extraction and refining of copper. These sorts of details will keep prices up in the commodity sector and drive inflation going forward.
Where Will the Market Be Over the Next Five Years?
The bottom line of all this is that we are likely not going to see a period of low interest rates like after the Financial Crisis where stocks were viable investments and bonds were not. The Fed is likely to hold the line on inflation and even if they achieve the elusive soft landing, we will be stuck with relatively high interest rates that will be a brake holding back business and depressing stock prices. In the middle of this there will always be opportunities for options traders working with folks like the trading squadrons at Top Gun Options.