The United States stock market has displayed tremendous volatility so far in 2018. The year started with some of the best gains and one of the strongest opening months in recent history, but was then followed by major drops as investors feared inflation and lost confidence in their holdings. Large selloffs led to further panic selling, and we ended up witnessing the biggest decline in history on February 5, when the Dow Jones plunged 1175 points.
Analysts have tirelessly tried to pump confidence into investors, noting that the economy is strong and the stock troubles are not reflective of the potential of the market. Finally, as we reach the mid-point of February, we may be seeing the market entering a healthy recovery period.
The Dow has been climbing for the last four trading days, ending on Wednesday up 253 points. We’re finally seeing positive numbers again, and this is excellent news for the market as a whole.
Why Has Confidence Returned?
One possible reason is that investors may be realizing that fears of inflation were not proportionate to reality. Consumer prices rose by just over 2% in the past year, and even though it was more than expected, investors seem to be accepting that a strong economy means interest rates (and general pricing) will begin to rise.
Putting things into perspective could also have made a significant difference. As interest rates rise, corporate profit and new investment can take a dip. However, it’s important to note that corporate tax rates have been slashed this year, so organizations will be able to offset most of the damage that can come from higher interest rates and rising inflation.
Another reason for growth could be that investors have jumped on the opportunity to pick up traditionally strong stock at lower prices. The massive climb of the market over the past few months has sent some stocks (particularly tech stock) skyrocketing. With the decline in February, it could have made some of these stocks more accessible. Investors who follow the news will know that the large tech companies like Apple, Microsoft, NVidia etc. all have the ability to recover well after a stock market downturn.
Stock Market, Is It Time to Buy?
Warren Buffet, one of the most successful investors in history, is famous for telling other investors to buy good stocks when they are low. Slightly lower stock prices of today do represent an opportunity to buy. Volatility means that there’s never any guarantee on income or losses, however, with a strong economy most analysts are expecting the stock market to grow by up to 10% by the end of 2018.
For investors that can afford to take some calculated risk, now could be one of the best times to do it.
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