Your Financial Future
This Monday we saw a huge drop in the stock market not only in the United States, but around the world. The S&P was down more than 2% which put it at 7.5% from all-time highs on July 16. This index follows 500 of the biggest U.S. companies in all different industries so it is probably most reflected in the U.S. economy overall. It is important to remember that this is a weighted average which means the Magnificent Seven have a very big impact. These seven high-tech stocks have risen much more over the last few years than the other 493 included in the index.
There were several factors that contributed to this meltdown. Many of the high-tech stocks are priced to perfection. This is because of their involvement in artificial intelligence. AI uses very high-powered computers to do remarkable things. Some fast-food chains are using it to take orders at drive-up windows. AI can gather information, write computer code, create movies and even imitate politicians. Part of the actors and writers strike last year was to limit AI uses to compete for their jobs.
While AI is remarkable technology, it takes billions of dollars of computer chip purchases, and most companies are not yet making money. There will be lots of challenges for government leaders to create regulations that will protect the public from criminals and scammers.
Another thing that contributed to Monday’s downturn was the yen carry unwinding. The Bank of Japan raised interest rates last week. Computers and sophisticated investors play a lot of financial games that you have not been invited to participate in. These traders would borrow money cheaper in Japan and then put money into higher yielding investments elsewhere. The higher interest rates made this practice less profitable.
Another factor was fear of inflation rising. The jobs report that came out last Friday showed that there were fewer new jobs created than expected. This caused some investors to panic and sell their securities. There still are 8 million unfilled jobs in America.
Many people want to blame the Federal Reserve for this downturn. They raised the interest rate starting about two years ago when inflation started to spike. Interest rates are currently at about a 23-year high, but inflation, while it has come down, is still higher than the Fed’s goal of 2% per year. It is important to note that it is not the Fed’s responsibility to help support the stock market. They are facing a difficult balancing act trying to control inflation and to keep us from falling into a recession.
It was not just stocks that went down this week. Gold and crypto currencies also suffered big losses. This recent meltdown cost U.S. investors more than $2 trillion and globally wiped out $6.4 trillion. We experienced a pretty big uptick the next day on Tuesday, but it did not come close to recovering everything.
It is important that any investments you make are reasonable to your risk tolerance and timeline. Many asset values are already high so there may be some limits on future gains. There seems to be some sector rotation taking place to different stocks. Google was found guilty just this week of using monopolistic powers to force out competitors. A number of other Magnificent Seven members are also facing scrutiny over some of their operating practices. Also, you may be competing against AI in making your future allocation decisions. Make sure you have a plan to deal with all of these issues.