Why Are Stocks Falling?
Short answer, because the Federal Reserve (also known as The Fed) wants them to. Is it odd that The Fed has so much power over the stock market? Yes, but that is the reality of our current financial system. Sadly we have a lot of debt in the financial system and we have a federal reserve that likes to print money. The money printing has finally come home to roost and inflation has gotten out of control. So, the only way to fight inflation is for the Fed to raise interest rates and perform quantitative tightening which will slow the economy.
The first reason that stocks go down in this type of scenario is that higher interest rates lead to higher yields on treasury bills(T-Bills). So large institutional investors will generally move from risk assets(stocks) to safer assets(government debt). When there is less demand for stocks because you can get higher returns for less risk, stocks go down. The quantitative tightening also takes some of the money out of the system so there is less money floating around to buy stocks.
The other reason is raising rates slows down the economy. It makes getting a loan(debt) much more expensive. Since many companies use debt to finance their growth, more expensive debt will keep them from doing that. Consumer consumption also tends to go down when people fear they may lose their job and credit card interest rates are higher.
So what should we do? Market declines, recessions and depressions are scary. In theory, you could try to rotate your portfolio to safer assets now and then move back into stocks at a later time. But what if you are wrong? What if you mistime the market? These are the kinds of financial moves that are devastating. Please DO NOT make any rash decisions out of fear(or greed for that matter). Please talk to a professional investment advisor you trust to make sure your accounts are still aligned with your long-term goals. This time of uncertainty will pass. Do not have fear, stay the course and your future self will thank you.
2 Timothy 1:7-For God has not given us a spirit of Fear, but of power and of love and of sound mind.
Written by Phil Francois, CFP®