Recently, the stock market has seen significant drops due to inflation and interest rate changes alone – though not because of them alone. There are other major contributing factors.
When checking your 401(k) balance or watching Fox News reports of doom-and-gloom economic forecasts daily, it can be easy to become disheartened and panic. But let’s step back and examine these issues objectively.
Why is the stock market down today?
The stock market has experienced recent volatility, which is part of its natural cycle that typically happens every four years or so. Although this volatility may make people nervous, remember that its long-term trend has been upward. For best results invest in high-quality companies with solid fundamentals while diversifying your portfolio.
One major cause of today’s stock market decline is rising interest rates. The Federal Reserve’s plans to slow the economy and bring inflation under control has caused 10-year Treasury bond yields to reach their highest point since 2005 – this pulls dollars away from stocks as more investors opt for bonds instead. Furthermore, increased bond yields make borrowing money more costly, potentially undercutting company profits.
One reason the stock market has taken a dive today may be due to people panicking and selling off investments they hold, an understandable response to fear; however, this can have detrimental repercussions for stocks as more people sell off, pushing down prices further while making it harder for companies to rebound after experiencing sell-offs.
Thirdly, today’s stock market decline is due to uncertainty regarding what lies in store for global economies and global markets in the future. A variety of events could have an effect on this uncertainty such as political events, trade conflicts and natural disasters; any of which can cause rises or drops depending on their effects.
Eventually, the stock market is bound to recover from its recent slump; however, it’s important to remember that markets can be highly unpredictable, making it impossible to accurately predict their behavior in the short-term. Therefore, staying informed, diversifying your portfolio, and being patient are all ways of protecting your investments and maintaining peace.
What causes the stock market to go down?
The stock market fluctuates on an almost daily basis, as share prices respond to fluctuating supply and demand balances for stocks. If more people want to buy than sell one stock, its price increases; conversely if more sellers than buyers exist, its value decreases. Markets can be difficult to understand, so understanding why their prices rise and fall can be challenging; but basic principles of supply and demand can provide insight into why prices move in either direction.
Market crashes are relatively uncommon but can still happen. During the Great Recession in 2008, stocks had plummeted more than 80% from their peak before taking two years to rebound. Meanwhile, during COVID-19 pandemic outbreak in 2020, markets also fell more than 30% below their high point.
Stock market crashes refer to an abrupt, lasting decline in share prices that prompt investors to sell off their stocks out of fear and anxiety, sometimes as much as 10% per day in some severe crashes. They may be precipitated by various factors including worries over global economic health or political unrest.
Although it’s impossible to predict a stock market crash, there are certain steps you can take to protect yourself. Remember that the stock market is comprised of various investors making decisions according to their own individual opinions and interests.
If you find the markets too unsettling, investing in more conservative vehicles such as bonds or cash may be wiser. Furthermore, diversifying your portfolio across stocks and asset classes helps lower risk.
Another consideration should be the historical volatility of August as an especially volatile time of year for the stock market. Investors take vacations and trading volumes are significantly lower – creating increased volatility. Furthermore, higher interest rates can have negative repercussions for stocks with premium price-earnings ratios; tech companies with big growth potential have been especially hard hit by an increase in rates recently.
What can you do if the stock market goes down?
While investing can be an excellent way to build wealth, its pace won’t remain this steady forever. That is why it is especially essential to plan for potential bear markets by making long-term investments; research from IG has demonstrated this trend over its existence; over 10 year periods there has not been one instance in which investors saw total returns drop below 10% (not adjusted for inflation).
Preparing for a bear market requires knowledge about investment principles. Books like “A Random Walk Down Wall Street” and “The Elements of Investing” provide great resources to understand how best to approach the market when its value drops precipitously, and can help alleviate panic when its fortunes falter. Furthermore, having access to an experienced financial advisor who can answer questions and quell fears may prove extremely helpful in staying calm during these uncertain times.
Many investors’ initial response when seeing a drastic decrease in portfolio values is to sell off stocks immediately; however, that can actually backfire over time as CNBC Make It points out. By selling shares prematurely you risk missing out on potential gains and even derailing your financial goals.
Instead, when markets dip, focus on your long-term plan and don’t be intimidated to invest when stocks go on sale. Keep in mind that companies’ stocks only ever carry value based on what the market thinks of their future potential; should it look promising, its stock should increase over time.
Do not be distracted by market or company rumors that may or may not be accurate. Following such reports can often lead to bad decisions; instead, rely on information available and conduct thorough research before making purchases.
If your retirement or other investment accounts have automatic deposits, consider setting them to automatically rebalance during bear markets. That way, your top performing assets can be sold and reinvested into underweight areas without needing to manually sell and buy more expensive investments – plus you’ll have time to review and modify your overall asset allocation strategy if needed.
What is the future of the stock market?
Last year, many investors were panicked over what would likely be another stock market crash. To their relief, most haven’t suffered, as evidenced by an S&P 500 gain of 17% since January 1. Additionally, forecasts remain positive and remain bullish through most of 2023.
Reason being, the economy has proven remarkably resilient despite coronavirus pandemic, Federal Reserve rate hike campaign and ongoing trade tensions – the latest data show inflation continues to decline which could bode well for stocks.
However, much could go wrong in the coming months that could undermine this optimistic stock outlook. For instance, the Federal Reserve could raise rates yet again this year, potentially pushing the economy into a recession; and weather could also play a factor, with El Nino potentially driving down crop yields and driving up energy prices.
Still, market veterans see signs that the economy could be on track for a soft landing, which should bode well for stocks. Small-cap stocks – considered an early indicator of domestic economic expansion – have been showing significant strength lately and the Nasdaq Composite index appears close to breaking through an important technical barrier that could signal that its rally has resumed momentum.
An improving labor market, which serves as an indicator of consumer spending, bodes well for both the economy in general and stocks in particular. Furthermore, the Federal Reserve’s decision to slow its rate hike pace may also have positive ramifications for stocks; plus anecdotal evidence shows bank executives purchasing their own company’s shares – perhaps signaling good health within their industry.
No one has the ability to predict when the stock market will crash; therefore, investors can best prepare by maintaining a diversified portfolio with long-term goals in mind and remaining calm despite any volatility they encounter.
Rising Interest Rates
The Federal Reserve is raising interest rates in an effort to combat inflation. This is making it more expensive for businesses to borrow money, which could lead to slower economic growth. Higher interest rates also make bonds more attractive to investors, which can draw money away from the stock market.
The Fed has already raised interest rates four times this year, and it is expected to continue raising rates in the coming months. This is putting upward pressure on bond yields, which is making stocks look less attractive to investors.
Inflation
Inflation is at a 40-year high, and it is eroding the value of corporate profits. This is making stocks less attractive to investors.
Inflation is caused by a number of factors, including supply chain disruptions, the war in Ukraine, and government spending. The Fed is raising interest rates in an effort to bring inflation under control, but it is unclear how long it will take for inflation to come down.
Recession Fears
Many economists are predicting a recession in 2023. Recessions are typically accompanied by sharp declines in the stock market.
There are a number of factors that could lead to a recession in 2023, including rising interest rates, high inflation, and supply chain disruptions. The Fed’s aggressive interest rate hikes could also trigger a recession.
Other Factors
Other factors that could be contributing to the sell-off include the ongoing war in Ukraine, supply chain disruptions, and the upcoming midterm elections.
The war in Ukraine is causing uncertainty in the global economy and is pushing up energy prices. Supply chain disruptions are also pushing up prices and making it difficult for businesses to get the goods and materials they need. And the upcoming midterm elections could lead to political uncertainty, which could also weigh on the stock market.
Conclusion
The stock market is down today, and it could be the beginning of a major sell-off. Investors should carefully consider their risk tolerance and investment goals before making any decisions. If you are concerned about the volatility in the stock market, you may want to reduce your exposure to stocks or consider investing in more defensive assets, such as bonds.
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