Is the stock market freaking you out? Don’t worry – it’s natural to feel anxiety during complicated financial times, especially when all we hear on the news are negatives. But the truth is, ups and downs are a natural part of the economic cycle. That just doesn’t get clicks or views!
I won’t beat around the bush – the stock market is complicated. But by breaking down the information into easier to understand, digestible bites, I hope that I can ease some of that financial anxiety that you might be feeling.
A stock market update as of July 6, 2022
We have officially entered what financial strategists call a bear market. (No, not that kind of bear.) What that means is we’re seeing a significant period of time where the market experiences prolonged price declines.
A bear market is determined by when the market highs fall to 20% or lower and stay there for any period of time. This IS part of the market cycle, and it does happen, but it does significantly impact those who have investments.
What’s causing the bear market?
I could list about twenty different reasons for what could possibly be causing this bear market, but there are several pressing reasons that make this a unique situation, different from 2020 when the market was affected by the pandemic or 2008 when we experienced the housing market crash.
Unfortunately, this one pretty much affects all of us no matter if we have investments or not. We’re seeing inflation ALL around us; in the housing market, job market, even the grocery store. In 2021 inflation reached 7% and in 2022 we are on track for it to reach 8.5%. This is truly the most daunting cause of a bear market, for us AND the economy.
For context: the last 10 years inflation has been between or under 1% to 2%.
In the United States, we have what’s called The Federal Reserve, whose focus is on helping to make sure there is a healthy economy. The biggest tool that they have to fight inflation are interest rates, which have been rising.
Rising interest rates have an immediate impact on the economy as we know it – in the housing market alone it drastically affects mortgages and the interest on loans. Every 1% increase in interest rates causes a 10% decline in how much money you can borrow for home purchases.
Rising interest rates also negatively affect businesses. When interest rates get higher, it makes it much harder to borrow money. So when the economy is not doing well, those in business cannot sell. And as interest rates increase, the stock market responds accordingly.
What a bear market means for investments
When you invest in the stock market, you are essentially purchasing the ability to own part of a company. In order to facilitate this, companies need to figure out how much they are earning, but when interest rates go up, it makes it harder for companies to earn. You can see the issues that may cause…
Because of climbing interest rates, company evaluations are going down, and so the worth of the company goes down too. This, in turn, affects the stock market.
Company stocks aren’t the only thing that are affected. When interest rates go up and we’ve already loaned money to a company or a government, nobody wants to buy pre-existing bonds because bond prices are going way down in price at a higher interest rate. What’s unique about what’s happening in the market right NOW is that every single area is going down, which is unusual.
What to consider as this cycle continues
I know this sounds like a lot of negatives, but at the end of the day we’re investing in companies to make money. Yes this market is going down, but has it actually changed what’s happening? Is Walmart worth less today? Technically yes, but that doesn’t mean it’s going to stay that way. Walmart isn’t going anywhere.
One of the scariest things about investing is riding the ups AND the downs. Try to remember your long-term financial goals and continue investing the normal amount of money. This is where dollar-cost averaging comes in — you can get MORE stock for less money now, without paying any more.
We DON’T know what will happen next with the market cycle, but what we DO know is that the stock market has only ever gone up over time. There have been dips, but it has always rallied and climbed higher.
Stay the course. We can weather this storm, too.
Thanks for tuning in!
Thanks so much for checking out this episode of The Everyday Money Show with Hannah Moore. I can’t wait to bring you even more money myth-busting and to help more people see how they can live wealthy now.
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Resources mentioned in this episode:
- Check out the Everyday Money blog for more breakdowns of what’s happening in our current financial climate: Inflation Is Real: What Does It Mean for You?
- Use our BudgetingBlocks™ to plan a financial future that includes the highs and lows of the market. A good budget includes all possible financial scenarios and helps you see where your money is going!