Practical Tips for Understanding Today’s Market

July 21, 2022 by Spectrum Credit Union

So far in 2022’s undeniably tumultuous first half, we’ve seen record inflation persist, a bear market return and the prospect of recession loom. How can you make sense of this economic brew, and what moves might you make in response? Read on for answers to key questions that are on the minds of most of us right now — plus sensible ways to navigate the unpredictability.

What is a bear market?

Simply put, a bear market occurs when a broad stock market index falls 20% or more from its peak. The S&P 500 officially fell into a bear market on June 13, closing down 21% from its record high in January. (The Nasdaq Composite index entered bear territory on March 7, when it closed 20% below its November high.)

What to know: Market cycles are measured from peak to trough. When a bull turns into a bear, it can be tough to know exactly what to do. But staying the course with a defensive posture has its merits. Historically, bear markets tend to last 289 days on average. Bull markets usually last over three times as long. The good news for investors? Once stocks reach that threshold decline of 20%, they typically rebound over the next year or two.

What defines a recession?

Recession is loosely defined as a six-month stretch of significant economic decline. The official definition used to be two consecutive quarters of declining real gross domestic product (GDP), or the value of all goods and services produced during a specific period. Now that measure is more nuanced to examine broader shrinking of several indicators. Characteristics of recessionary times can include stock market turbulence, business cutbacks, unemployment and higher borrowing costs.

So, who’s responsible for making the call about a recession? The National Bureau of Economic Research (NBER) is the organization that identifies economic cycles. NBER decides we’ve experienced a recession only after it’s been going on for a while. So, it’s not easy to predict it before it happens. The organization’s next meeting is on July 19.

What to know: You may be seeing headline after headline reporting each extreme: recession is inevitable or avoidable. A consensus view is hard to come by, though many economists think it’s on the horizon in 2023.

How should I respond?

In the midst of such uncertainty, focusing on what you can — versus can’t — control is a sensible path to recession-proofing and bear-market taming. No matter what the second half of this year brings, tune-up these three strategies.

Resist panic moves. In the face of stock market volatility, you might be tempted to take action — or sit on the sidelines until inflation cools and the market calms. But think twice before abandoning strategies that worked fine in boom times. Dollar-cost averaging, for example — investing a set amount at regular intervals — works even better in volatile markets. It allows you to buy more shares when prices are low, lowering your average share cost over time.

Tip: Have a 401(k) with contributions on autopilot? Then you’re already dollar-cost averaging. Also, have taxable accounts? Stock losses realized now can be offset against gains to reduce your capital gains tax bill. In either case, it’s always good practice to review your investments to ensure they’re well-diversified, which can help cushion the blow of market volatility.

Beef up accessible emergency savings. Having liquidity, in the form of ready cash, can help you avoid having to sell stocks at a loss if you have an emergency and need to access funds. While the standard recommendation is to have enough savings to cover at least three to six months of living expenses, the chance of a recession makes the case for adding more to cash reserves now.

Tip: Stash these funds in high yield savings solutions or money market accounts, where returns are now rising along with interest rates. Our MarketEdge Money Market Savings account, for example, can accelerate your savings with rates that are consistently six times higher than the national average.

Pare down debt where you can. Why is this important now? As the Federal Reserve continues to raise rates to try to curb inflation, adjustable interest rates are set to increase — hiking the APRs of credit cards and certain loans. For example, the national average credit card interest rate rose above 17% for the first time in more than two years due to the Fed’s most recent rate increase. Eliminating balances (particularly the high-interest type) means monthly payments won’t be increasing unpredictably when the Fed raises interest rates again this year.

Tip: Check out Balance’s Cost Cutting Toolkit, a resource that can help you analyze all your expenditures and target specific areas where you can free up some money to put toward debt reduction.

Navigating unpredictable times

Coping with economic woes isn’t easy, but there are ways to reduce risk and preserve your finances. Your credit union membership can be a valuable asset, too, because it enables you to take advantage of multiple money-saving opportunities. Reacquaint yourself with all the benefits of membership today.

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