Why is the Stock Market Going Down?

Stock prices change due to the balance between supply and demand. When more people want to buy a stock than sell it, the price goes up. Conversely, when more people want to sell a stock than buy it, there is more supply than demand and the price falls. To learn more, check out How We Make Money. The stock market had a positive week as investors considered the possibility of the Federal Reserve slowing down due to sharp interest rate hikes.

Investors are taking this news seriously, even with recent reports of persistent inflation affecting consumer prices for car repairs, vet visits and other costs. The S&P 500, Dow Jones Industrial Average and Nasdaq Composite all had rare weekly gains in an ongoing bear market, which is also in the middle of earnings season. So far, companies are reporting good results, particularly in banking and technology. Social media stocks such as Meta (Facebook's parent company), Alphabet (Google's parent company) and Snap warned that advertising revenues are lower than expected. Their stock prices dropped in response.

Meanwhile, the Federal Reserve is looking for signs of economic and market slowdown as evidence that rising interest rates are cooling strong inflation. Existing home sales are already at 10-year lows, with 30-year mortgage rates hovering around 7%, more than double the 3% rates at the beginning of the year. Overall consumer payments for rents, mortgages and credit cards have also increased, according to a Bank of America report. However, unemployment claims continue to fall, which is a sign that the labor market is still too hot. As we approach the end of the year, experts recommend staying on course and maintaining your long-term investment goals regardless of what the market does.

Even during times of volatility in the stock market, it's best to remain vigilant but stick to your investment plans. It's impossible to time the market and historically it has always recovered. Ride out both highs and lows and remember why you're investing. Over the past few years, abundant jobs, high salaries and low interest rates have heated up the economy to a point where daily expenses such as food, utilities and housing are becoming more expensive. Two of the Federal Reserve's main mandates are to maintain a low level of unemployment and keep inflation to a minimum. It does this through monetary policy such as adjusting the country's money supply so that interest rates move towards their target rate.

This is because higher interest rates mean higher borrowing costs for businesses and individuals which should cool demand and reduce price growth. However, raising interest rates too quickly or too high could lead to a short-term economic recession which the Federal Reserve wants to avoid. It's a delicate balance to get right. There are still two more Fed meetings this year in November and December which investors are eagerly awaiting. GDP shrank in the last two quarters meeting the definition of recession.

Companies and employees are caught between wage growth in some sectors and layoffs in others. You would think that higher unemployment would be bad but it's actually contradictory. This is because as the Federal Reserve raises interest rates investors want to see a weaker labor market with higher unemployment as proof that inflation is finally starting to fall. Ups and downs are part of investing and right now is an excellent opportunity to maintain your average dollar cost of broad-market index funds at a lower cost.

The stock market

is usually positive for midterm election years although October can be notoriously volatile. In a few weeks we'll have election results and more economic reports that will guide us through the rest of the year. The Federal Reserve will continue tightening but results won't be automatic.

There is also geopolitical uncertainty about the ongoing war in Ukraine and a possible energy crisis in Europe this winter which can affect our stock market as well as global inflation. Whatever happens experts expect a volatile end to the year with no one knowing where the market is headed. As we enter the last earnings season of the year companies are already reducing their prospects for Q4 due to rising prices and loan costs. Remember that investments outperform inflation over time even with normal market ups and downs. For new investors large market fluctuations can be difficult to manage. There is a lot of uncertainty right now due to rising interest rates real estate prices and daily commodity prices due to inflation which reflects on the market daily. But if you have a buying and retaining strategy remember that slowly but surely you'll win out in the end.

The best-performing portfolios have been in the market for longest so invest early and often especially if you have a long investment term. You can even take advantage of declines to invest more but not if it affects your regular investment schedule. It's hard to tell when there will be a decline or correction so focus on your long-term strategy to make sure your personal finances are as resilient as possible. Diversify your portfolio with low-cost wide-market index funds so your eggs aren't all in one basket. Make sure your investments match your goals timelines and risk tolerance whatever you do. Ups and downs are part of investing but if you stay on course through descents and peaks you'll be able to achieve your long-term goals even during times of volatility in the stock market. Invest early often and wisely for best results.