What’s Going on With the Stock Market?
The stock market has been extremely volatile this week – down, then up, then down again.
The last fall was particularly steep; Wednesday was the worst day of the year for the Dow Jones, when it fell 800 points. (This happened shortly after the previous “worst day of the year” on August 5, when it fell 767 points.)
Yesterday’s drop was no doubt due to the inversion of the yield curve on Wednesday; For the first time since June 2007, two-year Treasuries began trading above 10-year Treasuries. The yield curve has not reversed since then, but the inverted yield curve is a historical and reasonably accurate predictor of a recession, although the recession itself usually does not start for another year or two – which is why these 2-year Treasury bonds should be profitable before the recession starts are suddenly more valuable than bills that have to be paid off in the middle of a recession that hasn’t happened yet. (If that doesn’t make you think of chickens, eggs, and snakes eating their own tails, I don’t know what to do.)
If you want a more technical analysis of what’s going on, here’s how Reuters explains it:
When short-term yields rise above long-term yields, it signals that short-term borrowing costs are more expensive than long-term borrowing costs.
Under these conditions, companies often feel that it is more expensive to finance their operations, and managers tend to hold back investments or shelve them. Consumer borrowing costs are also on the rise, while consumer spending, which accounts for more than two-thirds of US economic activity, is slowing.
Over time, the economy shrinks and unemployment rises.
But we’re not here to discuss the yield curve or the bond market – if you’re interested in learning more about what’s going on with Treasuries and bonds, Lisa Rowan has a great explanation . Today we take a look at the stock market and what this recent volatility means to you. Is it time to get off the roller coaster of the stock market or should you continue on your way?
The answer, like almost all stock market questions, has to do with how much risk you are willing to take.
CNBC interviewed behavioral economist Dan Ariely, who said paying attention to market fluctuations is the biggest mistake you can make right now:
“If we watch him go up and down, we’ll just be more miserable,” Ariely said. “Not only will we become more unhappy, but we will act accordingly.”
These moves often involve a flight from stocks to bonds or cash – investments with a higher expected value for those with a lower expected value.
“Historically, these are some of the biggest mistakes people can make,” he said.
In other words, don’t think that you will lose the value of your investment in the long run. There will be recessions, it may even be a recession, but buy and hold still works.
But what if you’re thinking about the shorter term? For example, what if you plan to retire in the next ten years? What if you deposit money into a brokerage account in the hope of using it as a down payment? Should I sell now before it gets worse?
Here are some data from MarketWatch that can help calm your nerves, or at least help you make an informed decision:
On average, the S&P 500 index returned 2.5% after inverting the yield curve in the three months after the episode, while it gained 4.87% in the next six months, 13.48% one year after that, 14.73% in the next two years. and 16.41% after three years, according to the Dow Jones Market Data [.]
They also have a chart showing how long it took for the S&P 500 to rally to its newest peak after a yield curve inversion. On average, the market reaches its next peak in 13.1 months; after the yield curve prior to the Great Recession, it was 20.5.
I am a personal finance writer, not an investment specialist, so I cannot give investment advice to anyone. But I can tell you that I am not planning to change my investment strategy yet; I still plan to make the most of my retirement accounts and my HSA while investing extra money in a brokerage account at the same time to make a higher return than I would get from a savings account or CD. I work for low-cost, passively managed index funds and ETFs, 82 percent of which are stocks (both domestic and international) and 18 percent are bonds. I will still be watching the market every day, mostly because I’m curious, but I don’t let that bother me.
And you?