It’s been a crazy week for stocks. Should we be worried? Here are 4 things to remember

It’s been a week that has rocked Wall Street as an era of easy money draws to a close.

Markets went on such a rollercoaster ride that it baffled even the most seasoned investors, ending, in remarkable fashion, with the biggest rally of the year for major stock indices.

The reason for all this volatility? The Federal Reserve telegraphed this week at its first policy meeting of the year that it plans to start raising interest rates as early as March to tackle inflation, which is at 40-year highs.

Markets are eyeing four to five rate hikes this year, with Bank of America predicting as many as seven hikes in 2022 on Friday.

Here’s what to know about an incredible week in the markets – and what it means for you.

Why are investors so scared?

Turns out, it’s not just average Americans who worry about the economy and inflation.

So are professional investors. A unique period in the history of Wall Street is coming to an end. For most of the period since the 2008 global financial crisis, inflation has remained relatively low and the Fed for the most part has kept interest rates near record lows.

It made it very inexpensive for companies to borrow money, and it fueled Wall Street’s record run.

This era seems to be over, or is coming to an end.

The central bank hopes to raise interest rates just enough to lower inflation, but not enough to hurt the economy. Investors are deeply uncertain about the Fed’s ability to strike this balance.

This has led to incredible swings in the markets this week, often within the same day. On Monday, for example, the Dow Jones Industrial Average fell more than 1,000 points to end the day with a modest gain.

The Dow Jones ended Friday with a gain of more than 500 points, the biggest of the year, while the Nasdaq jumped more than 3% after companies like Apple provided some comfort by reporting good profits. .

Even Wall Street veterans say they haven’t seen this kind of sustained volatility since the dotcom bubble burst in 2000 or during the 2008 financial crisis.

So what should we expect from the economy?

Analysts generally expect economic growth to slow this year after posting its strongest growth since 1984 last year.

That growth, however, was uneven, which is why many Americans don’t feel positive about the economy according to recent polls.

It’s not just inflation. The biggest challenge remains the pandemic itself. Whenever infections break out, it makes people nervous about going out and traveling, and it reduces consumption.

The pandemic is also keeping would-be workers on the sidelines, only prolonging staff shortages and supply chain issues that have weighed on the economy.

Take Lindsay Mescher, who runs the Greenhouse Cafe restaurant in Lebanon, Ohio. Right now, she’s struggling with not having enough customers, because of Omicron, but even when business picks up, she worries about rising prices.

“Just yesterday, I received a text message from my farmer. Our chicken has gone up a dollar a pound. And I understand that. Its costs have also increased. But I cannot continue to pass on these costs. I can’t charge $12 for a chicken and salad sandwich in this town. It will work,” she said.

The International Monetary Fund this week lowered its growth forecast for the U.S. economy to 4%, down 1.2 percentage points from its previous estimate.

What do these economic challenges mean to us?

Borrowing costs will rise as the Fed raises interest rates. We have already seen mortgage rates climb to their highest level since the start of the pandemic.

Auto loans and other forms of credit will also rise as the Fed raises rates. However, it is also important to keep things in perspective: rates are likely to still be low by historical standards.

The federal government will also be putting less money in people’s pockets now that most pandemic relief programs have ended.

But on the positive side, we are seeing increased wages and better benefits as employers have to compete for scarce workers, giving employees greater bargaining power. Friday’s data showed employer spending on wages and benefits rose 4% last year, the biggest increase in two decades.

Yet, on average, wages are still not keeping pace with inflation.

And what will this mean for stocks?

Some seasoned investors are sounding the warning that we are in really dangerous times.

One of them is the influential fund manager, Jeremy Grantham, who predicted this month that we are in the middle of a “superbubble”, with inflated stock, housing and commodity prices because that the Fed has kept interest rates too low.

But this is not a widespread opinion.

Other investors are calling it a natural recalibration after three years of strong stock market growth that stretched some companies’ valuations.

“I think what we’re seeing right now is sort of justified based on valuations and what the Fed has been telling us, which is why we were relatively cautious at the start of the year,” he said. Savita Subramanian, head of US equity research at Bank of America.

Tech stocks, in particular, have had an incredible rally, with the Nasdaq more than doubling in the past three years.

The high-tech index is now in correction territory after falling more than 10% this year, a decline that scares investors.

But in the end, professional investors call for patience. Markets have been steadily rising over the long term. We happen to be in the midst of a volatile race as stocks navigate an uncertain economy – and the end of an era of easy money.

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