The stock market’s major indices have fallen over 20 percent from their all-time highs. The Bear Market is here, and with an economic recession likely, stocks may have further to fall before there is another Bull Market rebound. Inflation is a major concern for not only prices for consumer goods but also the stock market.
The Federal Reserve has to combat inflation through raising interest rates. This type of action is not favorable for stock prices to rise because investors are not as bullish when it is more difficult for consumers to spend money. The growth of stock prices depends on the ability of companies to make profits, which causes investors to want to participate in the growth by purchasing shares.
In the first quarter of 2022, the U.S. economy shrank. There was negative gross domestic product (GDP) growth for the first time since the beginning of the pandemic. If the second quarter of 2022 also shows negative GDP growth, the economy will officially be in a recession. However, this recession will likely be milder than experienced in 2008 and 2009. The fundamentals of the economy are much stronger today than they were back then when the financial industry was on the brink of collapse due to the housing bubble bursting.
The upcoming recession will be entirely Fed-induced. Government policies meant to combat COVID-19 caused massive disruptions in the economy. It is necessary to take steps to protect people in a public health crisis, but it cannot be denied that the government’s actions are to blame for the instability in the economy.
When inflation shows signs of slowing, the Federal Reserve will be able to be less aggressive in raising interest rates. Investors will then become more bullish, which will help drive up stock prices. However, no one knows when this will happen. Consumer confidence is currently at an all-time low because of all the uncertainty in the economy.
Federal Reserve Chair Jerome Powell aims to bring inflation down to two percent, but it requires cooling the demand in the economy. Many financial experts believe the Fed should have acted quicker in its fight against inflation by raising interest rates sooner instead of allowing the economy to become overinflated.
For long-term investors who are focused on building retirement savings, the plan is simple. Keep investing no matter what the markets are doing. Zoom out and look at the bigger picture that shows the amazing gains that have occurred over the decades. The stock market has been able to weather every storm and come out on top every time. Patience and discipline are needed to maintain the strategy that will lead to economic prosperity, even in times of economic uncertainty.