For many investors this is definitely not the best way to end the summer. Historically, the markets do not move much in the month of August. This year the markets decided to take a different path, as the S&P 500 index plunged 9% for the month and 8% for the year.
But don’t make the mistake of thinking the end is near and the country is fast approaching another recession. It is true that a falling market damages consumer confidence while the media is sprinkled with scary headlines, but in actuality the market does not always reflect what’s really going down in the economy.
Here are three reasons not to freak out and call your broker about the latest market quakes.
1. U.S. Economy Is In good Shape
Production does not exactly match that of decades past, but as a whole the economy is still growing. Almost 1.5 million new jobs have been created this year, and over 11.5 million jobs have been created over the past five years. In addition, the housing market is improving, auto sales are on track for a memorable year, and consumers are spending more. Experts believe there to be a mere 8% chance for another recession, and it’s important to remember that market declines usually just reflect worries of the economy.
2. The Fed Can Intervene
Many believe the current market slump, a manifestation of China’s recent market decisions, mean a global recession or something similarly ominous is coming. In the unlikely event that this idea comes true, the Federal Reserve has a few weapons they can use to minimize any damage. The Federal Reserve has been hinting at hiking up interest rates for some time, but in the event they need to, they could reverse their decision and create a tightening cycle. The Fed could also resume quantitative easing, a policy it cut last year.
3. Bargain Time
Small traders and heavy hitting investors are already on the hunt for stocks and assets that have fallen in a way inconsistent with their fundamentals, and which are likely to recover. Japanese and European stocks will regain ground quickly because their central banks are more likely to employ aggressive stimulus tactics, as opposed to the U.S. U.S. stocks are notorious for being heavily valued, and while it might not be time to buy the dip just yet, that time will eventually come.
One financial expert on wallstreetjournal, Christian Broda, strongly believes the U.S. dollar, along with U.S. stocks and assets will bounce back above any lost ground. Christian Broda is a University of Chicago academic and later became a professor for the university for many years. The optimistic hedge fund manager is currently a researcher at the National Bureau of Economic Research and is the associate editor for the Journal of Development Economics.