The stock market fell sharply on Thursday morning after the release of September’s consumer price index (CPI) report, which showed inflation remained stubbornly high despite continued Fed efforts to control it.
then rallied in the afternoon, in a surprising comeback that sent the dow jones industrial average up 900 points.
the cpi for all items increased by 8.2% y/y and 0.4% m/m in September. that’s down from the 8.3% year-over-year increase in August and the record year-over-year increase of 9.1% in June.
However, the core cpi, which measures consumer prices excluding volatile energy and food prices, rose 6.6% in September compared to a year ago and 0.6% compared to August. this represents the largest increase in 40 years.
Today’s report sent the market tumbling initially because it likely means the Federal Reserve will continue to aggressively raise interest rates at its next meeting on November 1-2. Reducing inflation will spell discomfort for the economy and for investors, who are worried higher borrowing costs will reduce corporate profits and lead to lower share prices.
The Federal Reserve is teetering in a gray area right now, says Daly Anderson, CFA, CFP®, co-owner and managing partner of Tenet Wealth Partners. “They are trying to be diligent and have conviction in what they need to do, but they know it will cause them pain.”
Looking forward, expect more volatility this month as investors await the start of the third-quarter earnings season this week. Investor expectations of what the Federal Reserve will decide at its next meeting in November will also play a role in shaping the market.
We see market moves every day based on the news, whether it’s good or bad, Anderson says. That means investors can expect continued volatility “until we start to see some real results with inflation under control.”
What should investors do while all this is going on? As the end of the year approaches, experts recommend staying the course and dollar cost averaging toward your long-term investment goals, regardless of what the market is doing.
Historically, the market has always recovered. don’t change anything, especially if you have a long-term investment horizon.
why the federal reserve is raising interest rates right now
Over the past year or so, an abundance of jobs, high wages, and low interest rates have accelerated the economy to the point that everyday expenses like food, utilities, and housing are now becoming more expensive.
The COVID-19 pandemic also brought shortages and bottlenecks in the global supply chain, as well as extra money pumped into the economy through stimulus programs, driving up inflation in mid-2021.
andersson says that “what we’re seeing now is that [inflation] is brewing 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 central mandates of the Fed are to keep unemployment low and keep inflation at a minimum. it does so through monetary policy, including adjusting the country’s money supply to bring interest rates closer to the target rate set by the fed.
Higher interest rates mean higher borrowing costs for businesses and individuals, which should cool demand and reduce long-term price growth. However, raising interest rates too much could lead to an economic recession in the short term, something the Fed wants to avoid but is a difficult balance to strike.
“When [the Federal Reserve raises] interest rates,” explains Anderson, “that will slow corporate growth because [businesses] aren’t looking to borrow money at these high rates for growth or for capital expenditures. therefore, it has the impact of slowing down [borrowing] in order to reduce the prices of things around us.”
Are we in a recession?
united states gdp shrank in the last two quarters, meeting the definition of a recession.
“By technical and historical definitions, we are in a recession,” says Linda Garcia, founder of In Luz We Trust, a financial community targeting Latino investors.
Economists still say it’s too early to tell if we’re in a true recession, but the technical definition of a recession is of little concern to Americans faced with rising prices, rising interest rates and layoffs. the q3 gdp report is expected later this month, which should provide more clarity.
The labor market is caught between wage growth in some industries and layoffs in others. for now, it remains stronger than desired by the Federal Reserve, which wants to see the unemployment rate closer to 4%. it fell to 3.5% in September.
You would 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 Fed raises interest rates, investors want to see a weaker labor market, with higher unemployment, as proof that the rate hikes are working and that inflation will finally start to kick in. fall.
due to these factors, explains garcia, the market is in a reset. It’s a great time to start investing in the stock market, especially if you’ve been watching from the sidelines for a while. “This is a great opportunity for people to start learning about the market, start participating or continue to be diligent in their monthly stock market investments.”
Ups and downs are a natural part of the investment cycle, and in any case, right now is an excellent opportunity to keep dollar cost averaging in broad market index funds at a lower cost.
will the stock market recover?
“We have all kinds of things that we are trying to digest. And there’s a lot of uncertainty,” Andersson says. “Midterm elections, the Federal Reserve, corporate profits [are] happening this year, only in this country.”
United States the stock market is usually positive for mid-term election years. In a few weeks, we’ll have the election results and more economic reports to guide us through the rest of the year.
There is also geopolitical uncertainty over the ongoing war in Ukraine and a possible energy crisis in Europe this winter. global events impact our stock market and inflation is persistent around the world.
Whatever happens, experts expect a volatile end of the year, and no one knows where the market is headed.
Remember that investments easily outperform inflation over time, even with normal market ups and downs.
how investors should deal with stock market volatility
For new investors, big swings in the market can be difficult to navigate. There is a lot of uncertainty right now due to interest rate hikes, rising real estate prices, and everyday staples getting more expensive due to inflation, and the market reflects that day by day.
But if you have a buy-and-hold strategy with low-cost, broad-market index funds, remember that the race is slow and steady. the best performing portfolios are the ones that have been on the market the longest.
“The most important thing is to always remember what you are investing for,” says Thomas Muñoz, Life Financial Advisor at Telemus, a financial advisory firm. “Short-term volatility is obviously something people should be aware of. But if you have a long-term time horizon, historically the stock market goes up. And when that’s the case, it’s important to have the discipline to stay dollar cost averaging on your [investments].”
Dollar cost averaging spreads your deposits over time and has proven to work best “during a period of big market downturns,” she says, according to Rebecca Zavaleta, creator of the First Milli investment community.
Whatever you do, invest early and often, especially if you have a long investment schedule. Crashes and dips will happen, as will other scary-sounding things like economic bubbles, bear markets, corrections, death crosses, and recessions.
You can even take advantage of a downturn to invest more, but not if it affects your regular investment schedule, Muñoz advises. it’s hard to tell when there’s going to be a drop or a correction, and “even the best investors in history can’t time the market.” As an investor, the best response is to stay the course and keep investing, regardless of what the market is doing.