Theres a reason we’re very choppy in the market right now. Inflation is at all time highs. Interest rates need to go UP, but governments have resisted upping rates. The problem is credit card debt is also at all time highs (870b in the US currently). The savings rate is at 15 year lows (how much income people save) at about 4%. If youre old enough to remember this is similar to the consumer debt mountain we had in 2008. The difference is back then people were loading credit cards with cars and holidays (and even houses). Today they’re just buying essentials to get by. So we have high inflation, record credit card debt, low savings, but interest rates cannot go down any further. Governments also cannot print more money because inflation is already too high. Interest rates need to go up, and probably a lot. This puts pressure on all debt. And remember, there are much bigger debts floating around the world than your credit card and mortgage.
This is a perfect storm of BAD things happening economically. Remember if defaults on that debt start to happen in any significant way (people cant pay off their cards, for example), that “money” disappears. That’s money that banks were expecting to get, and now they won’t. Times that by a few million card holders and things may not be looking so good for the bank. House prices are also at record highs and so if mortgage defaults start, banks record those as losses too. Any of these things can kickstart a downward spiral. Interestingly many economies are still growing GDP but some G7 countries finally turned negative growth in Q1 2022. So now we’re in a spot where the market is very uncertain because nobody can guess what happens here. We might hit a full on recession OR central banks might somehow figure it out and get us out of this without too much damage. But all the ingredients for a very bad time are there if they push the wrong button.
What can you do? Personally, I think it wise to keep some cash. Even if you’re losing 5% to 10% pa in inflation, if the market drops 50% you definitely want to have some cash. If you want to buy stocks, focus on companies with low or zero debt loads and strong margins, these are the companies resilient to rate hikes and inflation. If you’re indexing, keep following your long term plan and dont panic. Save as much as possible and cut back on luxuries as much as possible. In a recession, cash is NOT trash, cash is king, queen, emperor, tzar, and god himself. If no recession comes, you still have a pile of cash in a time of rising interest rates. If recession does come, you are in the king’s seat and can make a serious assload of money.
Not financial advice. I am not your financial advisor.
