The bear market we currently find ourselves in elicits different reactions from different people. Given the fact that the portfolios of the majority of investors lost 50% of their value from last December, it’s perplexing to see that there are some people who are able to remain calm amidst market-wide panic. In order to understand why that is, we need to understand the reason behind the market crash we see today so that we are better able to gauge the situation.
Inflation and the Pandemic
The COVID-19 pandemic wreaked havoc on supply lines due to the high number of job losses and the restrictions that were necessary to limit the spread of infection.
With bottlenecked shipments and a shortage in workers, it was common for commodity shortages to occur, which meant that retailers had to increase the prices of their goods in order to compensate for the mounting cost to conduct their business.
This inflation of prices threatened to break the economy because if the price of commodities was too high, and employment rate was also high, there wouldn’t be any money flowing through the economy because people wouldn’t have enough money to buy the commodities they need.
This was the reason why the federal bank issued stimulus checks to keep the economy running. The problem here is that while stimulus checks may keep the economy afloat, it will also produce inflation. This is especially true when you consider that the supply chain problem still isn’t rectified.
Federal Interest Rate Hikes
Anything that drives investors away will significantly affect the stock and crypto markets. The federal bank plans to use interest rate hikes to manage inflation rates. While interest rate hikes may seem like they don’t have a direct effect on the market, the truth is that some investors take out loans to secure a larger position in the market.
Increasing the interest rates of these loans will not only hurt the profits they would have earned, but they may even put borrowers in debt. This is especially the case with open-rate loans. To prevent such a scenario, many investors sold their assets to pay off their loans and to secure the profits they’ve earned thus far.
This sell-off signaled to other trades that the market might be crashing, which, in turn, caused them to sell their assets. This cycle of fear and uncertainty was enough to trigger sell-offs at the stock market, which also eventually found its way into the crypto market. What troubles investors is the fact that they don’t know when and by how much the federal bank is going to raise interest rates.
Russia-Ukraine War Threat
Besides the obvious hindrance a war would cause on supply lines, a war between Russia and Ukraine will also cause oil prices to go up, which makes it more expensive to operate a retail business, which will increase inflation. This means that the federal bank has an even greater reason to increase interest rates.
What Should Investors Do?
At this point, it’s important to recognize the things that are within our control. While these exogenous factors do not count among those things, most seasoned investors understand that bear markets are a natural occurrence in any trading platform.
Investors can choose to accept a frugal life while the markets are weak, and they can also shift their trading patterns from long-term to short term. Some investors even continue buying from sources like this website regardless of the market conditions.