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James Barth, a finance specialist at Auburn University, said the stock market tumble was not a bursting bubble, but was mainly due to the Federal Reserve’s decision to raise rates interest as a way to fight inflation. He says investors should determine their individual investment strategy based on age.
What are the key factors behind the stock market’s fall this year?
The main reason for the decline in the stock market this year is the Federal Reserve’s decision to raise interest rates. The Federal Reserve is currently pursuing a tighter monetary policy to reduce inflation. This policy shift is a difficult task as it will lead to slower economic growth and higher unemployment if it tightens too much. If it tightens too little, inflation will not be sufficiently reduced. Higher interest rates and uncertainty surrounding the economic outlook make equities less attractive. Additionally, some inventory declined as customers showed less interest in products that were popular during the pandemic, but less when they return to pre-pandemic behavior.
Is the stock market bubble bursting?
A bubble occurs when stock prices rise only because people think prices will be higher than they are today. The fall in stock prices is not due to the bursting of a bubble, but rather to the fact that fundamental factors have changed. For example, a housing bubble burst a few years ago which contributed to the Great Recession.
What is the effect of rising interest rates?
Higher interest rates generally benefit savers but are more costly for borrowers. For example, people who want to buy a house face higher interest rates when applying for a mortgage. Also, it is important to realize that long-term interest rates generally incorporate an inflation premium, which means that higher inflation rates can contribute to higher interest rates.
What should investors do?
Young investors have more years ahead of them for the market to recover than older investors. The data indicates that stock prices rise over long periods of time with periodic fluctuations from time to time. This situation means that older investors may prefer a portfolio of safer assets given their life expectancy, while younger investors may prefer a riskier portfolio in the belief that a recovery will occur in the not too distant future. given their life expectancy.
Does it all depend on the price of gasoline?
Those who own and drive electric vehicles are less concerned about rising gas prices than those who drive gas-guzzling vehicles. However, higher gas prices lead to higher prices of other products due to passed-on costs.
What causes higher interest rates and higher prices, including gas prices?
Primarily, poor monetary and fiscal policies implemented by policymakers in Washington, D.C.
About James Barth:
James Barth is the Lowder Eminent Scholar in Finance at Auburn’s Herbert College of Commerce, Senior Fellow at the Milken Institute and Fellow at the Wharton Financial Institutions Center. He has been a visiting scholar at the US Congressional Budget Office, the Federal Reserve Bank of Atlanta, the Office of the Comptroller of the Currency, and the World Bank.