With the recent inflation news sending investors into a tailspin, they’re once again concerned about the future. After all, high inflation implies that the Federal Reserve will be forced to raise interest rates in order to keep prices stable, making bonds a more attractive investment. Higher interest rates also make it more expensive to borrow; as a result, companies are less able to invest in expansion and put demand and growth at risk.
From an historical viewpoint, it’s not hard to make the case that the stock market will collapse again. Also, history shows that the market does drop from time to time. As a result, the question of whether the stock market will fall again is answered simply: Yes, it is almost certainly going to do so. When will it happen, though?
Are we there yet?
Despite all of this, the fact is that the S&P 500 has already fallen about 20%. That’s a sizable decline as of yet, and it does provide a glimmer of optimism that the most challenging portion of the current market cycle may be over.
Even when a stock’s price has appreciated significantly, it remains to be important to remember that the market attempts to value equities on the basis of their future value-generating potential, not on what their past price changes were. When recent inflation statistics were released, they were far worse than expected, which is one reason why stocks plummeted so severely.
When the market experiences severe negative shocks, it typically prices assets lower to reflect higher perceived risk and/or poorer expected future returns. As a result, how many more terrible surprises we have ahead of us will determine whether the market crashes again soon.
What can you do about it?
With so much uncertainty in the economy and near-term future, it’s tempting to become immobilized into doing nothing at all. While keeping the course is typically a good approach to participate in any recovery that follows a recession, you’ll need the correct financial foundation in place to make sure it happens.
As a result, now is an excellent time to check up on your financial foundation and do what you can to strengthen it. That way, when the market inevitably drops again — as unpredictable as the markets are these days in any event – you’ll be better prepared to take advantage of it. On the other hand, if the market does not fall again during your investing career, having a solid financial base will still provide you great peace of mind even in today’s standard market volatility.
To build your financial foundation, you must have control of your debts. The only reasonable debts to have when investing are those in which all three of the following are true:
- The interest rate is low, with single-digit percentages or no interest at all.
- The fee is low enough that it doesn’t prevent you from meeting your essential expenses.
- Your debt is beneficial in the long run.
If your debt does not meet all three of these standards, you may be able to improve your financial position by paying it off or getting it in line with the criteria.