It’s been a wild week for equities. Should you be concerned? Here are 4 things to consider

It was a week that rocked Wall Street as an era of easy money comes to an end.

The markets experienced such a roller coaster ride that it stunned even the most experienced investors and, remarkably, ended with the biggest rally of the year for the major stock indices.

The reason for all the volatility? The Federal Reserve cabled this week at its first policy meeting of the year that it plans to raise interest rates as early as March to combat inflation, which has hit a 40-year high.

Markets are planning four to five rate hikes this year, with Bank of America on Friday forecasting as many as seven hikes in 2022.

Here’s what you should know about an incredible week in the markets – and what it means for you.

Why are investors so afraid?

It turns out it’s not just average Americans worried about economy and inflation.

Professional investors are too. A unique period in Wall Street history is coming to an end. Since the 2008 global financial crisis, inflation has remained relatively low for most of the time, and the Fed has kept interest rates near bottom for most of the time.

This has made it very cheap for companies to borrow money and fueled Wall Street’s record-breaking run.

This era seems to be over or coming to an end.

The central bank hopes to raise interest rates just enough to bring inflation down, but not so much as to hurt the economy. Investors are deeply unsure of the Fed’s ability to strike that balance.

This has led to incredible fluctuations in the markets this week, often on the same day. For example, on Monday, the Dow Jones Industrial Average fell more than 1,000 points to end the day with a modest gain.

The Dow closed Friday up more than 500 points, the biggest of the year, while the Nasdaq rose more than 3% after companies like Apple offered some comfort with good earnings.

Even Wall Street veterans say they haven’t seen this kind of sustained volatility since the dot-com bubble burst in 2000 or during the 2008 financial crisis.

So what can we expect from the economy?

Analysts are generally expecting economic growth to slow this year after posting the strongest growth since 1984 last year.

That growth has been patchy, however, which is why many Americans are not positive about the economy, according to recent surveys.

It’s not just inflation. The biggest challenge remains the pandemic itself. Every time infections flare up, it makes people nervous to get out and travel and it limits consumption.

The pandemic is also keeping potential workers on the sidelines, and that only prolongs the labor shortages and supply chain issues that have plagued the economy.

Take Lindsay Mescher, who runs the Greenhouse Cafe restaurant in Lebanon, Ohio. She’s currently struggling with not having enough customers because of Omicron, but even if business picks up again, she worries about rising prices.

“Just yesterday I got a text message from my farmer. Our chicken went up a dollar a pound. And I understand that. Their costs also increased. But I cannot pass on these costs. I can’t charge $12 for a chicken salad sandwich in this town. It’ll just work,” she says.

The International Monetary Fund this week cut its growth forecast for the US economy to 4%, down 1.2 percentage points from its previous estimate.

What do these economic challenges mean for us?

Borrowing costs will be higher if the Fed raises interest rates. We’ve already seen mortgage rates soar to their highest levels since the pandemic began.

Auto loans and other forms of credit will also increase as the Fed hikes interest rates. However, it’s also important to keep things in perspective: interest rates may still be low by historical standards.

The federal government will also put less money in people’s pockets now that most pandemic relief programs have ended.

On the positive side, however, we see rising wages and better benefits as employers have to compete for scarce labor, giving workers more bargaining power. Data on Friday showed that employer spending on wages and benefits rose 4% last year, the biggest increase in two decades.

However, average wages are still not keeping pace with inflation.

And what does this mean for stocks?

Some veteran investors are warning that we are in a truly dangerous time.

One of them is the influential money manager Jeremy Grantham, who predicted that this month we are in the middle of a “super-bubble” with inflated prices for stocks, real estate and commodities because the Fed has kept interest rates too low.

But this is not a widely held view.

Other investors are calling this a natural recalibration after three years of strong stock market growth that stretched some company valuations.

“I think what we’re seeing now is somewhat justified based on valuations and what the Fed is saying, which is why we went into the year relatively cautiously,” said Savita Subramanian, Bank of America’s head of US equity research.

Technology stocks in particular have seen an incredible rally, with the Nasdaq more than doubling over the past three years.

The tech-heavy index is now in correction territory after falling more than 10% this year, a decline that has investors spooked.

But at the end of the day, professional investors advise patience. The markets have grown steadily over the long term. We’re in the midst of a volatile ride right now as stocks navigate the uncertain economy — and the end of an easy money era.

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