Investors are facing a perfect storm of risks right now, from high inflation to the war in Ukraine.
This week, investors had to deal with a lot of bad news, which made US stocks fall even more.
Central banks all over the world have been working hard to keep inflation from getting too high by raising the cost of borrowing money without hurting long-term growth prospects. Rising tensions between the West and Russia after Moscow’s invasion of Ukraine add to the uncertainty and fear. The S&P 500, which is a good indicator of the health of retirement and college savings accounts in the US, fell to its lowest level in almost two years this week and was on track for a monthly drop of almost 8%.
So far in 2022, the tech-heavy Nasdaq 100 has dropped nearly 33%, the Dow Jones Industrial Average has dropped more than 20%, and Bitcoin, the most well-known cryptocurrency, has lost nearly 60% of its value. As interest rates rise, which makes loans for people who want to buy a home more expensive, home prices are also going down.
The Federal Reserve, which is the central bank of the country, has been raising interest rates to fight the highest inflation in decades. But can it raise the cost of capital to lower demand and keep prices down without causing a deep recession?
“At this point, there’s really no way to win.” This is mostly because policymakers have had to deal with so many shocks, “Cristiano deities, a top economist at the New York-based research firm Moody’s, told Al Jazeera.
How much lower can stock prices go? Just what is a “bear market”? Is there a way out of this situation?
I keep hearing that a bear market is happening in the US. What does that mean?
When a broad market index falls more than 20% from its recent high, this is called a bear market.
Why is the US in a bear market right now?
Peter Essele, the head of portfolio management at a Massachusetts-based company called Commonwealth Financial Network, put it this way: “Persistent worries about inflation and the Fed’s ability to keep prices in check without a hard landing.”
Why is there so much inflation, and why are prices getting out of hand?
Kenneth McLaughlin, an economics professor at New York’s Hunter College, told Al Jazeera that one reason is that the federal government “injected $5 trillion into the economy, including through stimulus checks during the pandemic, with kind of good intentions but no plans to pay for it.”
What do I mean?
Think back to the beginning of the year 2020, when businesses closed and economies stopped to stop the spread of the coronavirus. Millions of Americans were stuck in their homes and had nowhere to go to spend their new stimulus checks. That made the prices of stocks, Bitcoin, and homes across the US go through the roof. It also led to a big increase in the demand for goods, which has led to the biggest increase in the cost of living in decades.
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