If you are watching the stock market and feeling that familiar anxiety creeping in, don’t panic just yet. The stock market has been something of a yo-yo lately, after months of soaring to record highs it is suddenly bouncing up and down from day to day. It seems scary, but it’s likely that there is nothing to panic about. The culprit that started the yo-yo market was a consumer price report which was released by the Department of Labor. The report was actually really good for the country, consumer prices were only up half a percent in the first month of 2018 and are on a predicted path to 201 percent for the year. That rate is, according to the Federal Reserve, the healthiest for the economy overall.
So how is it that such a great report could cause the Dow Jones to plummet five hundred points in seconds? The answer is pretty simple. Overall, most people believe that the stock market is over valued. Generally, the stock market does not run at a correct value, but when people believe that the prices are too high, they begin to panic, which is what began this whole market mess. The market has been on a constant uptick since the beginning of 2009, prices have tripled in most cases if not more, and the election of Donald Trump cause a euphoric wave from traders who expected deregulation and tax cuts. This, along with consistent low interest rates from the Federal Reserve, has kept the market booming. The improvement in job numbers as well as the central bank raising rates generally causes a depression in the value of stocks. People who trade for a living know this and are looking to sell stocks before their value drops. This likely caused the bouncing in the stock market.
That said, the inflation report that was released should not have been such a big deal. In fact, it showed the country to be at almost perfect price levels in the economy, but traders have concern that inflation will become a problem down the road and began a freak-out because in their opinion the market is too high.
With Republicans in office, it is hard to say how the next few years will go and if they will be handled correctly. There is a delicate balance between interest rates and taxes, but Republicans are based on the idea of lower taxes which means they will do little to control certain aspects of the economy. The Federal Reserve still has plenty of tools to help fight inflation if it becomes a big problem, they could raise interest rates which will reign in bank loans, that said, it often has negative effects like forcing companies out of business which leads to unemployment, but that unemployment puts pressure on workers wages which will help keep prices in line. It isn’t an ideal solution, but one that works. That said, none of these are pressing issues today, the market is bouncing and having many good days, enjoy investing now and making money, but be aware of the signs when it is time to pull out. If you would like more detailed information, head to Huffington Post.