USM Finance Professor offers perspective on stock market instability

Fri 23-09-2022 – 11:13 am | By: Van Arnold

dr.  Srinidhi KanuridThe US stock market has taken investors quite a rollercoaster ride so far in 2022 with no apparent end to the nerve-wracking experience in sight. dr. Srinidhi Kanuri, an associate professor of finance at the University of Southern Mississippi (USM), urges patience during these volatile times on Wall Street.

“In general, investors who don’t panic and sell during bear markets benefit a lot,” Kanuri said. “A recession/bear market is a great opportunity to buy more stocks at a discount. Therefore, investors should be patient and continue to invest using low-cost index funds and ETFs (exchange trade funds).”

On January 4 of this year, the Dow Jones Industrial Average closed at 36,585.06. It has not reached that level since. By March 1, the market had fallen to 33,892.60, only to bounce back to 34,678.35 a month later. Just two months later, it dropped below 30,000 for the first time since January 2021.

On September 13, stocks plunged to their worst day in more than two years, pushing the Dow Jones Industrial Average down more than 1,250 points. Kanuri points to several key factors for the ubiquitous instability.

“The Federal Reserve has gradually raised interest rates to keep inflation in check, as inflation in the US has been high for decades. This has scared the markets,” says Kanuri. “Higher interest rates increase borrowing costs for companies. As a result, companies borrow and invest less as higher interest rates hurt their profits.”

Earlier this week, the Federal Reserve, in its efforts to bring inflation down to near its highest level since the early 1980s, raised interest rates to a range of 3%-3.25%. This was the highest since early 2008, after the third consecutive move of 0.75 percentage point. Estimates are that the rate hikes will continue through the end of this year.

Kanuri notes that higher interest rates also push up all other rates such as mortgage rates, credit card rates, auto loans, etc., discouraging people from borrowing or spending.

“All of this leads to lower economic growth,” Kanuri says. “Several experts also predict that we will have a mild recession in the near future. All of these factors have made markets extremely volatile in recent months.”

The stock market’s bumpy ride in 2022 has wreaked havoc on many Americans’ retirement portfolios, especially the popular 401(k). Asked what advice he might give a 401(k) participant, Kanuri said: “Young investors who are several years away from retirement should continue to invest in index funds/ETFs. The drop in price gives them a great opportunity to buy the stock market at a steep discount. They still have a few more years to rebuild their portfolio assets.”

On the other hand, Kanuri explains that older investors closer to retirement age may be able to shift more of their portfolios toward conservative assets such as bonds.

They can also do this by allocating more of their portfolio in their 401(k) to balanced mutual funds that invest in a diversified portfolio of stocks and bonds to provide growth, income and capital preservation, or Target Date Funds that provide a more of your portfolio in bonds as you get closer to retirement age,” said Kanuri.

Will the stock market continue a steady decline well into 2023? Kanuri gave two examples to highlight the historical resilience of the market.

  • During the financial crisis of October 2007 – March 2009, the S&P 500 lost nearly 56% of its total value. However, the market recovered strongly and from March 2009 to February 2020, the S&P 500 had a cumulative return of 400.5%
  • Similarly, the S&P 500 lost about -49% of its total value when the dotcom bubble burst (March 2000 – October 2002). In October 2002, markets recovered and the S&P 500 returned 101.5% from October 2002 to October 2007.

“It is very difficult to predict the exact direction of the market in 2023. However, markets always come back,” he said.

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