The Stock Market is in a Correction and Volatility Has Returned – But Why?
February 18, 2018
Low unemployment rate -> wage growth -> increased inflation -> Fed raises interest rate -> businesses pay more to borrow money -> market freak out.
So on Friday, February 2nd the DOL jobs report was released and showed a 2.9% growth in wages – this was largely due to the increase in economic activity and the low unemployment rate. You can’t mess with supply and demand – try and remember that because most people aren’t able to. Anyways, a 2.9% growth in wages really means that the supply of money in the economy increases – people have more money to spend, thus increasing the supply of cash relative to things to actually spend it on.
This has the effect of decreasing the actual value of money (supply of $ > demand i.e “stuff to buy” = lower $ value). This is called inflation. Now a reasonable amount of inflation can actually be a good thing – it shows that the economy is growing.
However, the Federal Reserve likes to ensure that inflation grows at a reasonable rate. To make this happen they will raise interest rates. This basically means that banks will pay a higher amount of interest to people saving money. More people will save money and thus reduce the supply of money in the economy – keeping inflation in check. This also has the downside of making money more expensive for everyone to borrow.
Businesses generally need to borrow money to grow and expand – and the possible rate increase fueled fears of a slowdown in economic activity due to the increased cost of borrowing money.
While this was the background to the correction there were two other factors in play:
1. Everyone was expecting a correction. Psychology plays a huge part in the market. Everyone knew that an extended bull run couldn’t happen forever, so when investors got an excuse to take profits, they did (by selling).
2. The prevalence of automated trading made it all happen a lot faster than usual. Only about 10% of trades nowadays are done by actual active people. Algorithms and automated programs make up the rest. Boeing dropped about 11% in a matter of minutes – something entirely unrealistic to happen if actual humans were doing most of the trades.
So what does this mean for the market? Essentially volatility has returned, so expect some days of swings rather than just day after day of rising prices. Just keep cool, find some cheap stocks that you’ve been eyeing and don’t be afraid to buy and hold.
Two interesting things also happened:
– Bitcoin didn’t rise inverse to the market drop. Gold did. Bitcoin is not the untouchable safe haven the fanboys make it out to be.
– An unknown trader nicknamed the “Whale” made $200 million by betting that volatility would return, proving that there are always opportunities to make money while others are running for cover.
#braindump #investing #money #stocks #correction #finance #entrepreneur #financialfreedom