Will Europe Market Continue to Surge
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The U.S. stock market had a winning week as investors weighed the possibility of the Federal Reserve slowing down on steep interest rate hikes later this year.
According to a report from The Wall Street Journal, the Fed is still likely headed towards another increase of 75 basis points at its next meeting in early November – it would be the fifth in a row this year – but may slow down after that to assess the effects of the increases through the end of 2022 and into early 2023.
Investors are taking the news to heart, even amid recent reports of persistent inflation affecting consumer prices on everything from car repairs to vet visits to child daycare costs. The S&P 500, Dow Jones Industrial Average, and Nasdaq Composite all had rare weekly gains in an ongoing bear market, which also happens to be in the midst of earnings season right now.
So far, companies are reporting positive results, especially in the banking and tech industries. Social media stocks, including Meta (Facebook's parent company), Alphabet (Google's parent company), and Snap all gave warnings that ad revenue is coming in lower than expected. Their stock prices fell on the news.
Overall company earnings are "pretty positive, but we haven't really seen big moves [in stock prices]," says Daly Andersson, co-owner and managing partner at Tenet Wealth Partners. "The reason is that everybody's eyes are on the Fed."
Meanwhile, the Fed is looking for signs of market and economic slowdowns as proof that raising interest rates is cooling hot inflation. Already, sales of existing homes are at 10-year lows as 30-year mortgage rates hover around 7% – a more-than-double increase from the 3% rates at the beginning of the year. Overall consumer payments for rent, mortgages, and credit cards are also up, according to a Bank of America report. But jobless claims are still falling, which is a sign of a labor market that's still too hot.
In typical economic times, low unemployment would be great news, Andersson says. "But when the economy's hot and the Fed's trying to slow it down, good news is bad news. [A strong labor market] doesn't help to slow down inflation."
For now, investors are waiting for the rest of earnings season results to filter in and for the next Fed meeting on November 1 and 2. They have a lot of information to process: reports from what happened in Q3, the ongoing daily volatility of the market, and forecasts for future Fed actions in 2023, which the current stock market is already starting to price in.
As the end of the year gets closer, experts recommend staying the course and dollar-cost averaging toward your long-term investment goals, regardless of what the market is doing.
Pro Tip
Even – and especially – when there's volatility in the stock market, the best course of action is to be aware, but stick to your investing plans. It's impossible to time the market, and historically speaking, it's always recovered. Stay the course through the dips and peaks, and remember why you're investing.
Why the Federal Reserve Is Raising Interest Rates Right Now
For the last several years, plentiful jobs, high wages, and low interest rates heated up the economy to a point where everyday expenses like food, utilities, and housing are now becoming more expensive.
The Covid-19 pandemic also brought global supply shortages and bottlenecks, plus extra cash injected into the economy through stimulus programs, which spiked inflation in mid-2021.
Two of the Fed's central mandates are to maintain low unemployment and keep inflation to a minimum. It does that through monetary policy, including adjusting the money supply in the country to make interest rates move toward the target rate they set.
"Investors are concerned about the future expectations," Andersson explains. "Those are still unclear – and slightly pessimistic." The intention of the rate increases, she says, is to "reduce demand for consumer products, which is going to, in turn, slow down inflation."
That's because higher interest rates mean higher costs of borrowing for businesses and individuals, which should cool down demand and reduce long-term price growth. However, raising interest rates too fast or high could potentially lead to an economic recession in the short term, which the Fed wants to avoid – but it's a delicate balance to get right.
There are still two more Fed meetings left this year, one in November and another in December, which investors eagerly await.
Are We in a Recession?
The U.S. GDP contracted in the last two quarters, meeting the definition of a recession.
"By technical and historical definitions, we are in a recession," says Linda García, founder of In Luz We Trust, a financial community geared toward Latinx investors.
Economists still say it's too early to tell if we are in a true recession, but the technical definition of a recession is of little concern to Americans who are dealing with soaring prices, rising interest rates, and job layoffs. Q3's GDP report is expected later this month, which should provide more clarity.
Vanessa N. Martinez, CEO and founder of Em-Powered Network, a consulting firm, says it's inevitable. "Yes, there will be a recession. We're slowly trickling into one." But, she adds, "it's the natural cycle [of the market]."
Companies and employees are caught between wage growth in some industries and layoffs in others. For now, it's holding stronger than desired for the Fed, which wants to see the unemployment rate closer to 4%. It fell to 3.5% in September.
You'd think higher unemployment would be a bad thing, but it's counterintuitive. That's because, as the Federal Reserve raises interest rates, investors want to see a softer job market – with higher unemployment – as proof that inflation is finally starting to fall.
Ups and downs are part of investing – and if anything, right now is an excellent opportunity to keep dollar-cost averaging in broad-market index funds at a lower cost basis.
Will the Stock Market Recover?
The U.S. stock market is typically positive for midterm election years, though October can be notoriously volatile. In a few weeks, we'll have election results and more economic reports to guide us through the rest of the year.
"There is a lagging effect of the interest rate increases, and we've yet to see their impact," Andersson explains. "We need to see inflation really come down before we're going to see a recovery," or for the Fed to slow down on the interest rate increases. "I don't think we've hit that pivotal turning point just yet."
Martinez agrees. "We have to understand this will take time. The Federal Reserve will continue to tighten, but the results won't be automatic."
There's also geopolitical uncertainty about the ongoing war in Ukraine and a potential energy crisis in Europe this winter. Global events impact our stock market, and inflation is persistent around the globe.
Whatever happens, experts are expecting a volatile finish to the year – and where the market is headed is anyone's guess. As we enter the final earnings season of the year, companies are already lowering their Q4 outlook because of increased prices and borrowing costs.
Keep in mind that investments easily outpace inflation over time – even with the normal ups and downs of the market.
"In the time that we're in today, you still want to take advantage of what the market is giving us: really strong companies that are in it for the long haul at the lowest prices we've ever seen," says Martinez. "Why wouldn't you buy now?"
How Investors Should Deal With Stock Market Volatility
For new investors, big swings in the market can be a lot to handle. There's a lot of uncertainty right now because of interest rate hikes, increasing real estate prices, and everyday commodities getting more expensive because of inflation — and the market reflects that on a day-to-day basis.
But if you have a buy-and-hold strategy, remember that slow and steady wins the race. The best-performing portfolios are the ones that have the most time in the market.
"This is where things get challenging for all of us, because we're human," Andersson says. "We have emotions when it comes to our own money. But what we've seen historically is when we react to [market volatility], it's often to our own detriment."
Instead, "it's the time for us to focus on our long-term strategy to make sure our personal financial situations are as resilient as they can be." She always recommends diversifying your portfolio, such as those with low-cost, broad-market index funds, so your eggs aren't all in one basket. Make sure your investments are appropriate for your goals, timeline, and risk tolerance.
Dollar-cost averaging spreads out your deposits over time, and has been demonstrated to perform better during a period of high market crashes, according to Rebecka Zavaleta, creator of the investing community First Milli.
Whatever you do, invest early and often, especially if you have a long investment timeline. Dips and crashes will happen, and so will other scary-sounding things like economic bubbles, bear markets, corrections, death crosses, and recessions.
You can even take advantage of a dip to invest more, but not if it impacts your regular investing schedule. It's hard to tell when there will be a dip or correction, and no one can time the market. As an investor, the best response is to stay the course and keep investing, despite what the market is doing.
Source: https://time.com/nextadvisor/investing/latest-stock-market-news/
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