Remember: Volatility Is Normal

Major U.S. stock market indices climbed into record territory during August. They gave back some gains last week. Peter Wells of Financial Times explained:

“Speculation about a fresh round of tariffs on Chinese imports from the Trump administration weighed on U.S. stocks, handing the S&P 500 its first four-day losing streak in a month. A strong jobs report only hardened expectations that the Federal Reserve views the U.S. economy as healthy enough to withstand a probable interest rate rise later this month.”

Strong economic growth and rising wages have the potential to push inflation – increases in prices of everyday goods – higher than the Fed’s 2 percent target. The Fed battles inflation and promotes financial stability by raising the Fed funds rate. Usually, higher rates make borrowing more expensive and slow economic growth, reported Katherine Reynolds Lewis at Bankrate.com.

Rising rates in the United States have an effect on emerging markets, too. Colin Dwyer of National Public Radio reported higher interest rates in the United States have enticed investors and they have moved money out of riskier emerging markets investments.

Last week The Wall Street Journal reported, “Emerging markets tipped into bear territory…The MSCI Emerging Markets Index’s 0.3 percent decline Thursday, led by selloffs in Russia and the Philippines, pushed that gauge of stocks in poorer countries 20 percent below its recent peak, the common definition of a bear market.”

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