What’s going on with the financial markets? Specifically, what’s behind the price swings of the past several weeks? And, more important, how should you, as an individual investor, respond?
To begin with, the recent volatility was not really all that extraordinary. The daily drops pushed U.S. stocks down about 10% from their recent record highs, although they have regained some of that ground. A 10% drop represents a “correction” – not a crash – and historically, corrections have occurred about once a year.
So what seems to have caused these market jitters? Here are the key culprits:
Anticipated slowdown in economic growth and corporate earnings. The stock market is forward-looking – investors make decisions based on what they think will happen. And right now, many investors are anticipating a slowdown in economic growth (partially due to higher tariffs and trade disputes) and corporate earnings (as the jolt from the corporate tax cuts begins to fade). We may still see reasonably strong economic growth and corporate proﬁ ts, but possibly not at the same level as we had for much of 2018. Rising interest rates – The Federal Reserve raised interest rates in 2018. While higher rates are not bad for all market sectors, they can slow the expansion plans for many businesses, resulting in reduced growth prospects. The Fed may continue its gradual rate increases, but investors are closely watching for any signs that might lead the Fed either to pause or increase rates more rapidly. Slowing global economy – The global economy is growing more slowly than expected, resulting in lower returns for international stocks and a particularly sharp decline in emerging markets.
While it’s useful to understand the factors causing the