Will Market Continue to Fall After Friday

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Last Thursday, the U.S. stock market began heading toward a six-day losing streak, then had the fifth largest same-day reversal in the S&P 500's history. All three major indexes –  the S&P 500,  Dow Jones Industrial Average, and Nasdaq Composite – ended with gains.

But Friday's session started with losses across the board, leaving investors scratching their heads about what just happened.

September's Consumer Price Index (CPI) report, released last Thursday, showed a 0.4% increase in consumer prices compared to August. Core consumer prices, which strip out more volatile food and energy prices, went up 0.6% compared to August.

September's overall CPI is still up 8.2% year-over-year, down from August's 8.3% year-over-year increase. While that's much lower than June's record-setting 9.1% increase, these numbers show persistent inflation and suggest the Federal Reserve will continue to aggressively raise interest rates at its next meeting from November 1 to 2, which is what spooked investors into selloffs early Thursday.

But then a surprising rebound happened in the afternoon.

It's hard to say for certain why stocks suddenly turned higher around midday, but Daly Andersson, co-owner and managing partner at Tenet Wealth Partners, offers a possible explanation. "The S&P 500 had lost half of the gains from [between] the low during Covid-19 in 2020 [to the January 2022 peak]. That was a big technical point to hit," says Andersson. Many investors cashed in on profits from put options — by buying stocks — which drove the market higher in the middle of the trading day.

From there, the market was swept upward by its own forward momentum. Andersson also says the volatility we experienced could be "more noise" caused by evolving sentiment and investors reacting to headlines – notably, the latest inflation report and the first batch of company profit reports as earnings season begins in earnest.

Getting inflation down will mean discomfort for the economy – and for investors, who are concerned higher borrowing costs will cut into corporate profits and lead to lower stock prices. But the Fed is unlikely to change course based on one or two reports. Instead, they've committed to ongoing interest rate increases to prevent inflation from getting baked into the economy permanently.

Already, consumer spending is flat even without adjusting for inflation, and homebuyer demand is at a 22-year low as average rates for a 30-year mortgage now exceed 7%, the highest in two decades. This seemingly bad news shows the rate increases might be working. If the hot labor market begins to cool, that would be another welcome sign that inflation is getting under control. There's no doubt the Fed is closely monitoring all of these metrics.

What should investors do while all of this is happening? As year-end gets closer, experts recommend staying the course and dollar-cost averaging toward your long-term investment goals, regardless of what the market is doing.

"This is a great time for investors to get in – slowly – but definitely take advantage of these times," says Vanessa N. Martinez, CEO and founder of Em-Powered Network, a consulting firm. I's a good idea to take a look at your budget and if you can, "slightly increase the portion you're putting away for investments to dollar-cost average into the market," she explains.

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.

Andersson says that "what we're seeing now is that [inflation] is getting baked in – and we don't want the cost of our goods and production to continue to rise at this level." That's where the Federal Reserve comes in.

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.

"Raising interest rates is the strongest tool they have," says Martinez. But they know they also have to be gentle because it affects the market so much." She affirms that there will be some short-term pain, but "they're trying to control the outcome of inflation continuously rising."

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 high could potentially lead to an economic recession in the short term, which the Fed wants to avoid – but it's a tricky balance to get right.

"When [the Fed raises] interest rates," Andersson explains, "that's going to slow corporate growth because [businesses] are not looking to borrow money at these high rates for growth or for capital expenditures. So, it has the impact of slowing [borrowing] down with the goal of slowing the prices of things around us."

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.

Martinez 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. This is a case of "bad news is good news." 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 as we've just seen. 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're 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, 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 ones that have the most time in the market.

"This is where things get challenging for all of us, because we're humans," 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 demonstrated that it performs better "during a period of high market crashes," says 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's going to 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.

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Source: https://time.com/nextadvisor/investing/latest-stock-market-news/

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