No one knows where the stock market is headed long-term — but no one’s complaining this week. The S&P 500 just had its best monthly performance since November 2020. It’s a stunning turnaround following a bumpy start to the year.
For the second week in a row, the U.S. stock market is up. The S&P 500 and Nasdaq are 2.8% higher for the week, while the Dow is up almost 2% as investors digest the latest Federal Reserve interest rate hike, reports of an impending recession, and a fresh batch of Q2 earnings reports.
First up, the Fed opted to push interest rates up another 75 basis points, or 0.75%, in a bid to get inflation under control. Investors were initially fearful of the rate hikes earlier this year; now they’re applauding the Fed’s aggressive stance to get rates up quickly, especially if it results in a “soft landing,” or milder-than-expected recession.
In June, the personal consumption expenditure (PCE) index, the Fed’s preferred measure of inflation, showed a 6.8% year-over-year increase — the highest since January 1982. It’s still much higher than analyst estimates and a reminder that inflation is still running way too hot.
This week’s bear market rally is the best after a rate hike since 1970. In fact, it’s nearly level set the market to when the rate increases began earlier this year. That’s excellent news, but there are still plenty of moving parts contributing to an uncertain path ahead.
Next, the question on every investor’s mind this week: Are we in a recession or not? New data from the Bureau of Economic Analysis revealed U.S. economic growth fell 0.9% in the second quarter. Growth declined 1.6% in Q1.
The classic definition of a recession is two consecutive quarters of negative economic growth, which we now have. But the reality for investors is much more nuanced.
Fed Chairman Jerome Powell said this week in a press conference that he doesn’t believe the U.S. is currently in a recession because, “there are too many areas of the economy that are performing too well.”
Even the White House admitted “there are no fixed rules or thresholds that trigger a determination of decline” by The National Bureau of Economic Research (NBER), the official arbiter of recessions. For now, consumer spending is up and companies such as Apple, Amazon, and Ford beat their own earnings expectations in Q2. In a “typical” recession, consumer spending falls as the unemployment rate soars — and we simply don’t have those contributing factors this time around.
Lastly, we’re squarely in the middle of earnings season — the weeks when companies report their results for the previous quarter. So far, over half of S&P 500 companies have beat expectations. The Fed isn’t meeting again until late September, so investors (and the market) have some time to make sense of this very active week.
What Does a Recession Mean for Investors?
It’s still too early to know if we’re in a recession, but all the signs point to a yes. “The media and politicians can debate all they want on whether or not we’re in a recession, but by historical and technical definition, we are in a recession,” says Linda García, founder of In Luz We Trust.
But President Joe Biden disagrees, saying it’s “impossible” for the economy to be in a recession. Treasury Secretary Janet Yellen echoed this sentiment with similar comments this week.
“The facts are the economy is in better condition than the headline numbers suggest. Despite inflation and everything else, the average person is still able to work and shop,” says Brad McMillan, chief investment officer at Commonwealth Financial Network.
Clearly, investors like what they see based on this week’s market rally. But we still need to watch where consumer spending is headed, based on lackluster performance and overstock issues from major retailers like Costco, Target, and Walmart that started ringing alarms in Q1.
While this week is a much-needed bright spot, investors should watch for effects and fallout of the interest rate hikes and shifts in consumer spending as we get deeper into the back half of the year.
Despite what ends up happening with the recession declaration, the best course of action is to stick to your plan and to keep investing. Ups and downs are a natural part of the investing cycle — and if anything, right now is an excellent opportunity to keep dollar-cost averaging in broad-market index funds and enjoy the sea of green coming our way.
Will the Stock Market Fall?
The stock market has been on a wild ride this year. And there may be further to fall, according to experts.
The geopolitical impacts on food and energy tend to affect overall prices and therefore, the stock market. Supply chains are finding relief, and demand is high for goods and services, especially because the labor market remains tight.
We’re also in the midst of Q2 company earnings reports and forecasts for Q3, which are having a big impact on investor sentiment.
That’s why it’s important to keep a level head, García says. “If we can move through this and not allow it to affect us emotionally, that’s a big win.” These last two weeks have shown newer investors the potential of long-term investing because “they’re seeing their first gains for the first time. It’s important for them to feel excited and see the possibility available in the market and the opportunity that it offers.”
Remember, investments easily outpace inflation over time— even with the normal ups and downs of the market. As an investor, the best response is to stay the course and keep investing, despite what the market is doing. That said, it’s always encouraging to see the market have a winning streak, especially in a year like this one.
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 with low-cost, broad-market index funds, remember that slow and steady wins the race. The best performing portfolios are ones that have the most time in the market.
Even — and especially — when there’s volatility in the stock market, the best course of action is to be aware, but stick to your investing plans. It’s impossible to time the market, and historically speaking, it’s always recovered. Stay level headed through the dips and peaks, and remember why you’re investing.
“The most important thing is to always remember what you’re investing for,” says Thomas Muñoz, financial life 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 keep dollar-cost averaging your [investments].”
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, Muñoz advises. It’s hard to tell when there’s going to be a dip or correction, and “not even the best investors in history can time the market.” The best advice is to stick to your plan and keep investing.
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