With the recent turmoil in financial markets, it would be easy to fear that we’re once again nearing the end of the world: things are bad, and the outlook is even worse. Why else would stock markets fall so sharply over the past few weeks? Even bond investments have lost money – which feels painfully familiar to the everything-loses-money scenario of 2008.
The Good News and Bad News
If it’s any consolation, the market turmoil may be a result of good news – not increasingly bad news. Granted, things are not perfect. Unemployment is still too high, and many Americans are having a hard time keeping up. What’s more, the economy is growing at a snail’s pace (but at least it’s growing!). So we’re not out of the woods yet, but it seems like we don’t really want to be.
In fact, we may be in a situation where good news is bad news, and vice versa. The trigger for much of the recent volatility seems to be a fear that the Fed will soon begin tightening (even though they thought they said “tapering”). If that happens, the days of easy money propelling markets higher will come to an end (or at least the money will be less easy) and we’ll have to count on the economy to produce growth and jobs under its own power.
Can the economy do this? Who knows? But it looks like the market is skeptical. The market would rather continue on under an easy-money scenario. It’s as if we’d rather hang around the emergency room, a little uneasy about whether or not the economy is going to make it, than to hear that all’s well and we can take the economy off life support and go home.
What Should I Do?
You may be looking at your account balance or your quarterly statement wondering “What should I do?” The answer is probably nothing, unless you’re a trader or unless your investment goals have changed. As Miranda Marquit stated previously, now is not the time to panic. If you’re investing for a long-term goal, this good-news-is-bad-news situation is just one more reason to ignore the media hype and day to day movements of the market. Stick to your long term strategy, whether you’re planning for retirement, funding a child’s education, or just building wealth for your future.
Remember: the Fed only intends to taper/tighten if the economy starts to regain strength, and that would be a good thing for long-term investors – unless you’re one of those people who really likes buying low. But it presents a challenge for traders and money managers who are judged on short-term performance. If you’re not one of them (and you think we’ll come out of this in reasonably decent shape), maybe you don’t need to do the same things they do.
Of course it’s impossible to predict the future. However, if we assume we’re in a world where good news is bad, you can expect more of the same. Good news (more hiring and economic growth) would mean that the Fed is more likely to tighten. Bad news would be a relief and mean that markets have a little more breathing room.
Someday, if all goes well, maybe we’ll no longer depend on the Fed to pump up the markets and the economy. Organic economic growth might even help the markets move forward at a boring, but acceptable, rate. We’ll hear that the economy is on solid ground, and that won’t make us nervous. Good news will once again be just fine.
But don’t be surprised if things get too good someday (which may be many years away) and we once again fear good news. We’ll yearn for a weak jobs report to convince the Fed that it’s too early to tighten. Hopefully that day will come, and hopefully you’ll know what – if anything – to do about it.
Pat Murphy is the publisher of Feeling Financial. Pat writes about personal finance with a focus on how our emotions and behavior affect financial outcomes.