This past week has left many feeling anxious about their investments in the stock market. As a certified public accountant, I refrain from offering investment advice. Nevertheless, I feel confident maintaining my investments in the stock market. Why, you ask? Let’s consider the bigger picture.
Markets are still way up
Younger millennials and members of Gen Z might be distressed over the recent market declines. However, we’ve encountered worse situations before. Back in March 2009, the Dow Jones Industrial Average plummeted to less than half of its value from two years prior. Over the last 15 years, it has rebounded sixfold.
Currently, the economic challenges we face are less intense than in 2009. Market corrections do occur, and speculation can sway prices. This explains why the Dow Jones average has dropped around 15% since its peak last November. Nonetheless, it remains at its highest level since late 2022.
Despite experiencing losses – and there will always be such losses – those who invested in the market over the last decade are generally in a strong position.
The economy is OK
In the previous month, the economy added over 228,000 jobs, even with the reduction of several hundred thousand government positions. Other indicators remain robust as well. Yes, manufacturing has slipped into contraction recently, but this isn’t surprising, given its longstanding trend. On the other hand, service industries are enjoying their ninth consecutive month of growth. Unlike in 2009, capital is accessible and our banking system remains sound. Consumer spending continues, and wages are rising faster than inflation.
It’s too early to judge Trump’s tariff moves
Indeed, Donald Trump’s trade policies are causing disruption. It may take several months – or longer – before we see clearer results from these moves. Trump’s strategy to push the US economy to face challenges early in his presidency could potentially lead to a favorable turnaround by the end of his term. I wouldn’t be surprised to witness more market fluctuations driven by speculation and individuals seeking attention. However, I doubt they will decline to the same extent as in 2008.
Growth policies under way
There are currently several pro-growth policies in progress, with more anticipated.
Like it or not, federal regulatory oversight has been reduced due to several executive orders and the dismantling of certain agencies. This shift will allow business owners to concentrate on their operations instead of worrying about federal regulations. More importantly, both the House and Senate are actively discussing and looking to finalize various tax reductions, potentially extending or permanently establishing many benefits from the 2017 Tax Cuts and Jobs Act and even erasing taxes on capital gains, overtime, social security, and tips.
While not all of these measures will be implemented, some will. Once they are, consumers may find themselves with extra cash, and businesses could experience sustained long-term growth, encouraging further investment.
A cooling of inflation?
The bond market appears to believe that inflation will ease. This is indicated by the notable decline in bond yields over recent weeks. When inflation is expected to lower, yields tend to drop as well. Traders are suggesting that, despite tariffs, there will be enough of a deceleration to curb price hikes and possibly prompt the Federal Reserve to decrease interest rates. Could this slowdown lead to a recession? Possibly. However, lower interest rates would result in reduced borrowing costs and less strain on government debt repayment.
One significant beneficiary of reduced interest rates would be the residential real estate sector – accounting for up to 18% of the US economy. Many potential homebuyers and sellers have been hesitant due to elevated interest rates. However, with falling bond yields, mortgage rates (which are influenced by anticipated inflation) are also declining. By late 2023, the average mortgage rate was around 8%, and it has now dipped close to 6.5%. We are nearing a potential turning point that could rejuvenate this market. As spring and summer approach, I expect to see more buyers and sellers emerge.
I’m sure numerous economists, scholars, and opinion leaders might disagree with these views. But the essential takeaway is: do not sell your stocks. Stay the course. Historical evidence shows that, unless you engage in speculation or strike it lucky with an isolated success, investing broadly in the stock market through mutual and index funds typically yields better returns than other investments. If you have surplus funds, think about increasing your investment in these funds. Of course, it’s wise to consult with a knowledgeable financial advisor and assess your specific risks. But overall, take a breath. You’ll be just fine.
