The stock market moves in one of two directions: either up or down. Lately it seems to have been going down quite a bit. Currently, the S&P 500, which is comprised of the top 500 publicly traded companies in America, is down 7.8% so far for the month of December.
As you can see with this chart, the S&P 500 was up 9.62% ytd on September 20thonly to reverse course to being down 3.97% for the year as it stands today.
What has caused the drop? Higher interest rates? Dropping oil prices? Trade war with China? The answer is: All of the above.
So far, the Federal Reserve has raised interest rates three times in 2018 and have indicated they will likely raise rates again this month. They have also indicated they would like to raise rates another three times in 2019. The US economy is strong and inflation is in check, so why so many interest rate increases? The Fed has indicated that they want to get interest rates back to a more normal number after many years of being below normal rates.
Here’s my take. The Federal Reserve is trying to give themselves a bit of a cushion. You see when we have an economic crisis, whether it be a banking or real estate bubble burst or we slip into a recession, normally the top ammo the Fed has to fight these crises is to lower interest rates. If interest rates are extremely low, there isn’t much wiggle room for the feds to move. Thus, we get into a situation like Japan got into and that’s negative interest rates. This is where you pay your bank to hold your money.
I’ve always suggested that rising interest rates aren’t bad if it’s like a plane taking off, slowly gaining altitude. However, if the Federal Reserve starts to aggressively raise rates, then this can become problematic. It can stunt economic growth and cause dramatic dips in the stock market. How aggressive is too aggressive? That’s hard to know. Keep in mind, it takes about six to nine months for a rate change to be felt in the economy. If the Fed overshoots with the rate increases, it could slow down the economy drastically. Think of Goldilocks and the three bears. The goal is not too hot, not too cold but just right. Getting it just right on interest rates can be difficult.
We started the year with oil prices around $60 a barrel. In June, we were around $77 a barrel and today we’re around $46. This creates havoc with energy stocks which creates havoc with the overall stock market. The good news is we should start seeing better gas prices at the pump.
The trade war in China has been in the news a lot in 2018. It still early to know how the tariffs will impact the markets. The tariffs will certainly affect companies who are not only doing a lot of business in China but also who have most of their supply chain based in China. Many technology and manufacturing companies fall into this category so those two areas could continue to be affected.
It’s been a bumpy 2018 and 2019 could be more of the same. The key is be invested in quality investments that ride the waves of the stock market fluctuations. In these markets, I’d shy away from being super aggressive especially if you’re closing in on retiring. Be patient, keep socking your money away in your retirement accounts and buckle up. The ride might still be bumpy ahead but if you keep on trucking the road usually eventually smooths back out.
Live free my friends