Wall Street had an interesting week. After a sharp decline on Monday, the markets rallied, only to be wiped out again by Tuesday afternoon. They then shifted to an upward trend, making considerable gains on Wednesday which carried into Thursday. With such a volatile week for the market, the question remains, how do we proceed?
The answer? Cautiously.
If you are within five years of retirement, can you afford the risk of the market? The market could continue to grow, but a number of factors point towards an inevitable correction.
Yes, the market rebounded. But a large part of the rebound was due to intervention by the Chinese government. They lowered interest rates on Tuesday, and consequently soothed investors, but was this enough to stop the bleeding? A bandage over a wound doesn’t mean the wound has disappeared.
We live in a globalized world. Everything is interconnected, our economies interdependent and intertwined. When the second largest economy in the world struggles, we will feel it. This isn’t like Greece. When Greece faced possible collapse, the markets panicked for a day but then truly recovered. Because in the grand scheme of the global economy, investors realized Greece is too relatively small to do any real harm to us. China is different. We have far too many large companies with a lot of exposure to China. They are involved in the production process of many of our goods. Furthermore, China is in a transitional state in their economy. As they move into a consumer driven era, their growth will be slower than in the past. We are not isolated from them. If China struggles, it is likely to affect us here.
Domestically, the markets have recovered with the help of the Fed. Quantitative easing helped sustain the market after the recession in ‘08. The Fed kept an active hand in the economy. Now, they have no announced intention of intervening in the market. Interest rates are already at historic lows; QE is over. Current market conditions may hinder their plan to raise interest rates. The Fed has become reactive.
In addition, some analysts suggest that profits have not grown fast enough to keep pace with increasing share prices, and this could cause a correction in itself.
So, while the market rallied in the middle of the week, it does not necessarily mean the volatility has ended. There are likely to be more challenges ahead, and any of these variables could be the trigger which pushes Wall Street into the third correction of this secular bear market. Those looking to retire within five years do not have the time horizon to recover if the market were to correct itself. With your retirement on the line, would you play the market’s game of volatility?
If you must, please proceed with caution.
