Stock market volatility is becoming the new normal. The last few days have experienced some wild market swings, with global markets in panic mode. In the past, these types of fluctuations have led to crashes. Yet instead of a full scale crash, the market instead seems to have entered into a sustained period of volatility. Here’s what you need to know.
The United States economy is performing well, with low interest rates and a relatively stable outlook. Yet the trade wars threaten to make consumer goods far more expensive, while potentially causing nigh irreparable damage to the agricultural community. This pairing has led to an unpredictable market, which is bolstered by the stable economy, but continues to waiver due to potential upset.
Trade Wars Threaten Consumer Confidence
Whenever new information about the US-China trade war comes out, the market tanks, and that’s because investors become frightened that their investments are about to go south. But when investors realize that the consequences of the trade war are likely to be farther off, the prices start to go up again. This cycle keeps going.
Many investors are moving into gold, bonds, and other items that historically have low volatility. These types of investments generally do better when the stock market is volatile, because investors are looking for lower risk options.
No End in Sight to Market Volatility
With the trade war continuing, it isn’t likely that this volatility is going to go away. At this point, the volatility could cease when the trade war ends, or it could simply lead to a large market crash. If the trade war continues, it’s likely to eventually spurn a recession due to the rising price of consumer goods. And that’s not great news for anyone.
But the global marketplace is in turmoil for more reasons than just the US-China trade war. With Canada experiencing major real estate and housing issues, the United Kingdom encountering Brexit, and oil prices wavering, there are many global contributing factors. Even with the US-China trade war resolved, some of these issues could linger.
Many analysts argue that this is actually a good thing. The stock market dropping suddenly has also dropped the price of many high valued stocks, which will still have inherent value. Analysts liken this to a “sale” on goods: a 50% off sale doesn’t mean that the product is necessarily worth less, it only means that it can be purchased for less.
What Should Investors Do
Most people aren’t day traders. Most people just want to know what they’re supposed to do with their retirement account while the market tanks. First of all, you shouldn’t panic. In fact, you should consider investing in lower priced stocks. A quick call to your adviser will tell you whether this is prudent, but if you’re nowhere near retirement age, this could be a tremendous opportunity to buy new stocks. (If you are nearing retirement age, well, you may need to start shifting your assets to lower risk areas.)
When it comes to retirement accounts, all your purchases are long-term. You shouldn’t be thinking about selling within the next five years, if at all. Buy and hold is the name of the game. For the casual day trader, volatility may be going up enough that new investments may become dangerous.
But none of that means that younger investors should be pumping all their money into their retirement account right now. Investors should continue to invest at the same pace that they’ve always invested in, rather than increasing the amount of money that they invest. Trying to time the market is notoriously difficult, especially in times of volatility; stable, incremental investments are less emotional.
Stock markets are meant to be invested in long-term, and short-term volatility really doesn’t matter to most investors. But for those who are actually investing regularly, day trading, or trading on margin, these new swings are both exciting and terrifying. The stock market is presently being influenced by so many factors that analysts aren’t certain how the market will swing. It’s very possible that the worst is yet to come.