Many people fear investing in the stock market because of the ups and downs associated with it. Short-term market volatility is normal, but the long-term is where money is made. In this article, I’ll explain some of the causes of Stock Market Ups and Downs.
Will Rogers was a famous political writer and humorist in the early 1900s. Here’s his advice for making money in the stock market. “Buy a stock. Then, when it goes up, sell it. If it doesn’t go up, don’t buy it.” If only it were that simple!
The most important thing to understand is that the stock market is not the economy. It’s a lead economic indicator. In other words, it anticipates what the economic conditions will look like 6 to 9 months into the future. Market trends reflect what informed investors believe the future economic situation and stock prices will be in 6 to 9 months relative to today.
An example of a lead economic indicator in another field is new home building permits. A rise in permits today indicates that the builders are predicting higher demand for houses and, therefore, higher home prices in the future.
However, lead economic indicators are not infallible. Markets react to unanticipated, geopolitical events that can suddenly change the entire playing field. COVID-19 is a perfect example. After the first wave of COVID-19, the markets plummeted. However, as of this writing’s date, the Dow has nearly recovered, and the NASDAQ and S&P 500 are at record highs.
Wars and rumors of war in certain parts of the world can also affect the market. Events like these cause investors to recalibrate future expectations. However, historically, the markets have come back to eventually hit new highs.
You’ve probably heard of a market sell-off. Well, to sell anything, there must be a buyer. So, while some are selling off, others are often buying up at bargain prices. The people who get hurt are the ones who make fear-based decisions.
Choppiness can occur anytime in reaction to breaking news or economic reports regarding interest rates, employment stats, GDP, etc. Historically, though, certain months and seasons predictively provide short-term market changes. For instance:
- April is when many investors make strategic tax-related moves that involve buying or selling assets.
- August is commonly associated with low trade volumes because traders are on vacation. Low volumes can cause short-term volatility.
- December is when investors make yearend moves with respect to capital gains taxes.
However, these short-term movements don’t worry savvy, longterm investors.
2020 is a major election year. Many people worry that the election results will affect the economy and the financial markets. While the White House has an enormous influence on economic policy, its ambitious policies are frequently challenged, curtailed, and modified in the legislative and judicial branches.
Your financial professional can help you craft an investment strategy that takes all the above factors into account. Your plan should contemplate financial fundamentals as well as geopolitical factors and withstand market volatility.
If you don’t have a financial professional, and you have questions or concerns regarding your current financial situation, I’d be happy to discuss these or any other financial matters with you.
Remember and find comfort in the fact that the stock market is not the economy.
Eric Harding is the founder of empiriKal partners, llc ©. He’s a graduate of Hillsdale College, where he learned these four conservative pillars – Freedom, Learning, Faith, and Character.
In 2016, Eric established his firm as an independent Registered Investment Advisor (RIA) based on Hillsdale’s four pillars.
While some investment advisors fixate primarily on market fundamentals, Eric’s team looks through a geopolitical lens, finding opportunities that others might miss.
To learn more or to schedule a complimentary, confidential interview, go to www.empiriKalpartners.com or call 480-558-6167.
Investing involves risks, and investment decisions should be based on your own goals, time horizon, and risk tolerance. The return and principal value of investments will fluctuate as market conditions change. When sold, investments may be worth more or less than their original cost. Past performance does not guarantee future results.
The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and content provided are for general information. This is not a solicitation for the purchase or sale of any security.