The big market swings in the U.S stock indexes recently are similar to a roll-a-coaster ride. Climbs a little, drops a little, then a huge climb followed by a sudden elevator drop. You get the gist. This is called Market Volatility.
All the 3 indexes have seen a fair share of the gain only to give it away very rapidly and then regain some back. This rapid market swings sometimes shakes investors off causing them to take steps they otherwise would not have taken. For example, some might sell existing stock holdings thinking the market is going to go down more. Some might buy new stock to add to their portfolio or buy more of existing stocks they own to dollar cost average the price.
Why is this happening?
- Investors are expecting a rate hike by Federal Reserve later this year and are adjusting their portfolios accordingly. It costs more to borrow money so the consumers reduce their spending. This reflects is companies quarterly report as lower revenues and profits. In turn, the stock value drops. When several thousands of stock keep losing their value the market continues to decline.
- Oil is sliding down again and is in $45 range. Oil prices and U.S. economy are tightly intertwined – although lower prices at the pump are welcomed by many, people are losing jobs in Texas, North Dakota and other places that depend on the oil industry.
- U.S. dollar is gaining momentum against other major currencies. A higher dollar slows down the exports as it costs more aboard to buy the U.S. products. Lower export contributes to lower revenues and profits for companies that rely on exports like GE, Boeing, Caterpillar and likes.
Should you be In or Out of the market?
The U.S economy remains the strongest economy in the world. Investors from all over the world are pouring money in the U.S. Hiring is at its best level, companies have or in the process of raising minimum wage. Overall the markets are strong and are poised to extend their bull run.
However, in the interim there will be some corrections. Don’t let the daily gyrations shake you out. If you are long term investor, then this is just noise; ignore it and sleep well. If you have a shorter time horizon, then reduce your positions and sit on cash for a few months.
This is day-traders market – volatility provides them more opportunities to take trades. I’ll do a post on day trading soon!