Why Stocks Tanked (And What Should I Do Now?)
Disclaimer: This is not financial advice. Do your own research before making any financial decisions.
The Stock market isn’t a fun place right now. The S&P 500 is down 21%, NASDAQ is down 27%, and the DOW is down 17%. I hate to say it, but this plunge was inevitable and I don’t think it’s a short-term dip. Interest rates determine how much risk people want to take: high rates = low risk tolerance (more attractive to keep money in the bank) while low rates = high risk tolerance. With interest rates being near zero for the last 10+ years, companies were encouraged to prioritize “growth” over everything and the market was rewarding them for it.
Even if the downturn was inevitable, why did it come crashing down so fast? INFLATION. The war in Ukraine, people in their mid-twenties making millions from selling jpegs, and rising oil prices didn’t help but if you ask me, the fast rising inflation all started with stimmy checks going to people who didn’t actually need them.
I’m all for helping people in need, but did a single US citizen (who was still working their full-time job) making damn near $100k need an extra $1,300 to make ends meet? The intent of the stimulus check was great but the government did an awful job of setting thresholds for the recipients.
The graphic below shows the spending breakdown of the three stimulus checks. People spent the majority of the first stimulus check which is great as it means they needed it.
Service and hospitality workers/businesses were financially impacted the most by the pandemic. Instead of helping them disproportionately, the government continued handing out free money to virtually everyone, many of whom were working from home and saving a ton of money. Since most people didn’t need the stimulus checks, they started saving/investing and paying off debt. Oh on top of this, the government froze student loan payments. The ability for people to take risk rose to a never-before-seen level, leading to the “stocks only go up” mindset (thanks, Dave Portnoy).
Even though everything seems doom and gloom, this reset may be a good thing. We all may have lost money in the market this year but that doesn’t mean we should stop investing. Over the long-term, the stock market is the ultimate inflation hedge. The theory is simple: a company’s revenues and earnings will rise with inflation over the course of time. Over the last 10 years, the S&P 500 index has averaged annual returns of ~13%.
In 10 years, I expect the S&P 500 to be higher than it is today. I’m using Investii to consistently move money into my brokerage accounts so I can buy index funds like VOO. Building wealth is all about letting your money work for you. As long as you’re keeping enough in your checking and savings and investing the rest, you’ll likely be in a good future financial position!
