Will the Stock Market Continue to Fall?

The stock market has seen a decline that exceeds expectations. Periodic crashes occur for a variety of reasons, such as excessive market valuations after a prolonged bull market or external events that exceed other fundamental factors. In July, stocks rebounded from their June lows, but fell back again in August as investor fears of a recession increased. The S&P 500 and NASDAQ Composite indices fell back to bear market territory and reached their lowest points of the year in September.

Market volatility remains high, with the Dow Jones Industrial Average gaining 1,591 points in the first two days of October trading, followed by a drop of more than 1,000 points three days later. Explanations for the most serious market declines are often easier to find after the events. In early 2000, an extended bear market began, which persisted until early 2003, following in the footsteps of a long-lasting bull market. The most notable factor behind this significant decline in stock prices was the bursting of a stock market “bubble” in technology stock prices, in particular for some early-stage dotcom companies, when investors stopped paying higher prices for companies with little or no profit.

Eric Freedman, U. S. Chief Investment Officer at Bank says it's important to maintain an adequate perspective on the environment and warns that markets are likely to remain volatile. He urges investors to maintain a long-term perspective and consult with their wealth planning professional to ensure that their portfolio is structured in a manner consistent with their long-term financial goals.

Diversification and asset allocation do not guarantee profitability or protect against losses. The new tax provisions being considered by the House of Representatives and the Senate are included in the Inflation Reduction Act, recently passed by Congress and signed into law by the President. At this point, investors have become accustomed to temporary bear market rebounds, followed by even more severe losses. Nearly half of the trading days have seen the S&P 500 move up or down above 1%, indicating a higher level of volatility.

The Federal Reserve's stance on inflation has evolved over time. Last year, Fed officials said inflation would not be a problem and then promised that it would be “transitory”. They began to launch a “soft landing” for the economy, even as rates rose, and now they warn that more economic problems lie ahead by doing what is necessary to control inflation. Market participants have been slow to catch up with the party line and that is reflected in enormous volatility.

Inflation is still the tail that moves the dog in the markets and something has changed largely due to perception. Strong inflation will not die out in October and there will be no Fed meeting until November. Still, October should offer valuable clues about the pace of growth and whether the Federal Reserve's aggressive strategy will boost the U. S.

UU. September's market performance was a wake-up call for many investors, especially when the August Consumer Price Index (CPI) report showed that inflation had not reached its peak. According to Cliff Hodge, chief investment officer at Cornerstone Wealth, investors can expect similar volatility around the release of monthly inflation readings in October: “Inflation remains the most important thing” he says. David Schassler, director of quantitative investment solutions at VanEck will look at “the most rigid forms of inflation, such as food and housing prices” in the next CPI report.

If the Federal Reserve finally moves away from its aggressive rate-raising strategy, it will do so in the face of still-high inflation. The good news for growth-minded investors is the wealth of information to look for in the coming months.

Willis Pankiw
Willis Pankiw

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