USM Finance Professor Provides Perspective on Stock Market Volatility

Fri, 09/23/2022 – 11:13 am | by: Van Arnold

The US stock market has taken investors on quite a roller coaster ride so far in 2022, with no apparent end to the unnecessary experience in sight. Dr. Srinidhi Kanuri, associate professor of finance at the University of Southern Mississippi (USM), urged patience during these volatile times on Wall Street.

“Generally, investors who don’t panic and sell during bear markets make huge gains,” Kanuri said. “The bearish/bear market is a great opportunity to buy more shares at a discount. Therefore, investors should be patient and keep investing using low cost index mutual funds and ETFs (exchange traded funds).

The Dow Jones Industrial Average closed at 36,585.06 on January 4 this year. It hasn’t reached that level since then. By March 1, the market had fallen to 33,892.60 and reached 34,678.35 again a month later. Exactly two months later, it fell below 30,000 for the first time since January 2021.

13, the stock fell on its worst day in more than two years, plunging the Dow Jones Industrial Average down more than 1,250 points. Kanuri points to a number of key factors for widespread volatility.

“The Federal Reserve is increasing interest rates gradually to control inflation as inflation in the US remains at a multi-decade high. This has shaken the markets,” Kanuri said. “Higher interest rates increase the cost of borrowing for companies. As a result, companies tend to borrow and invest less because higher rates affect their profits.”

Earlier this week, in its quest to bring ongoing inflation near its highest level since the early 1980s, the Federal Reserve slashed its funds rate to a range of 3%-3.25%. This is the highest since the beginning of 2008, after a third consecutive 0.75 percentage point move. It is expected that the rate hike will continue till the end of this year.

Read |  China stock market may reclaim 3,300-point level

Kanuri notes that high interest rates tend to elevate all other rates such as mortgage rates, credit card rates, car loans, etc., thus discouraging people from borrowing or spending.

“All of this undermines economic growth,” Kanuri said. “Many experts are also predicting that we are going to have a mild recession in the near future. All these factors have made the market extremely volatile over the past few months.”

The stock market’s bumpy ride to 2022 has taken a toll on many Americans’ retirement portfolios — especially the popular 401(k). When asked what advice he might give to a 401(k) participant, Kanuri said: “Young investors who are several years away from retirement should invest in index mutual funds/ETFs. The fall in the prices of their shares should be This gives the market a great opportunity to buy at huge discounts. They have many years ahead to rebuild the assets of their portfolio.”

On the other hand, Kanuri points out that older investors who are nearing retirement age may shift more of their portfolio towards more conservative assets like bonds.

“They can also do this by allocating more of their portfolio in their 401(k)s toward balanced mutual funds that invest in a diversified portfolio of stocks and bonds, which provide growth, income and protection of capital, or goals.” To date funds that move as you approach retirement age, the bulk of your portfolio is in bonds,” Kanuri said.

Will the stock market continue its downtrend till 2023? Kanuri cites two examples to highlight the historical resilience of the market.

Read |  US inflation to dollar index: 5 factors that could affect the stock market next week

During the October 2007–March 2009 financial crisis, the S&P 500 lost approximately 56% of its total value. However, the market boomed, and from March 2009 to February 2020, the S&P 500 had a cumulative return of 400.5%. 2002). In October 2002, the market corrected, and the S&P 500 returned 101.5% from October 2002 to October 2007.

“It is very difficult to predict the exact direction of the market in 2023. However, markets always bounce back,” he said.

Source link