We have recently heard that the stock markets are killing it, rising up and up and up. However, it was only a matter of time before it made a correction and went back down. Last week we saw this. With the stock market being at an all time high and the economy doing well what caused this market drop and what does it mean?
Interest rates are rising. They rise in periods of Inflation. Therefore, if you can get less for a dollar the Lenders must adjust accordingly and take more. If you remember, during periods of inflation the Federal Reserve will raise the interest rates. Therefore, it will be more expensive to borrow money, which can negatively impact the economy, sparking fear in consumers.
Inflation is rising prices right? Well why do we think inflation is occuring? GDP growth is estimated to be 5.4%. This means the economy is growing 5.4%, compared to the normal GDP that is around 3%. This indicates that inflation could be occurring. GDP Growth = Increasing Prices. Another indicator that inflation may be occurring is the employment statistics...
Great News, unemployment is low, with reports at 4.1%. What this means is that most people have jobs and therefore consumer spending will increase. When consumer spending increases, demand increases, and therefore companies can increase prices. Hence, fears of inflation.
What is a Bond? Read my other blog post. But as interest rates go up Bonds become more attractive. You can make more return on your money. As well, they are safer so people start selling off their stocks, causing a dip in the stock market.
What Does this Mean?
Honestly, not the worse thing ever. Stocks were SO high that this is just setting them back to "normal" a little. We will just have to wait and see but this is not necessarily a bad thing. What goes up must come down right??