The highs have been high. The lows have been low. What’s up with the stock market’s extreme volatility this year?
For answers, UVA Today reached out to Mike Gallmeyer, a University of Virginia professor in the McIntire School of Commerce.
Gallmeyer serves as the Consumer Bankers Association Professor of Commerce, Finance Area and the director of the Center for Investors and Financial Markets at UVA. He specializes in studying how market imperfections influence security prices and trade.
His comments illuminated the market murkiness ahead of expected comments from Federal Reserve Chairman Jerome Powell on Friday.
Q. Why has the stock market been so volatile lately?
A. The market is just showing us the amount of economic uncertainty sloshing around right now. With uncertainty about inflation as well as the war in Ukraine, investors are trying to figure out what the economy is doing. With conflicting signals comes more volatility.
Q. Why does the Fed meeting in Jackson Hole, Wyoming, matter?
A. The Jackson Hole Conference has turned into an opportunity for central banks to announce potential policy shifts as well as a chance for central bankers and academics to discuss the latest issues faced by global markets. Given this, markets are expecting some signals about Fed policy from Jerome Powell, the Federal Reserve chairman.
Q. What are some things investors should be looking out for in the near future?
A. The most immediate thing moving forward is how the Fed’s stance on inflation may or may not change. If the Fed surprises the market by fighting inflation more aggressively through an unexpected interest rate increase, it would be a signal that future stock market cash flows are worth less today and the market will take a turn.
Q. Could we be on the verge of a 10-year correction?
A. The first part of 2022 ended up being a bear market for the S&P 500. While the second half of the year has been better for markets so far, what happens next will be driven by how the economy evolves and how Fed policy evolves. I wish I had a crystal ball to say more, but that’s not how markets work.
Q. What would you say to people who want to try to “time” the market?
A. Don’t. It’s simply too hard. Yes, there may be some out there who can do it, but they are doing it with a great deal of resources behind them – big data, models and an immense amount of experience. Even the best market timers make mistakes. Given it is so hard to do, the success rate is way too small for the average investor to try.
Q. Other than not trying to time things, what are some recommendations for safer investing?
A. Your investments should be catered to the risk you can bear. If you can’t handle a 20% loss or even more in a year for your portfolio, then stocks are probably not for you. So, it is best to hold a diversified portfolio that targets how much risk you can handle. The lessened risk means you will be holding more bonds and less stocks.
Q. If most investors track the overall market through index funds, and the market tanks, will people’s 401(k)s be OK?
A. Yes, as long as you are holding a portfolio that reflects the risk you should hold. For retirement, that’s typically tied to your “retirement horizon.” As you approach retirement, you typically want to hold less in stocks given you will be withdrawing from your portfolio soon.