Investors have had a wild ride this week, with the S&P 500 swinging from its biggest one-day loss in almost two years to its best performance in the same period. Aside from delivering whiplash, the stock market is also sending some important signals to ordinary investors, savers and consumers alike, experts say.
The recent bout of volatility was sparked by concerns that the U.S. economy is slowing – or could even buckle into a recession — after some weak economic data, including the disappointing August 2 employment report. The slowdown in hiring is raising the specter that the Federal Reserve has acted too slowly to cut interest rates, which the central bank last month maintained at their highest level in 23 years.
The stock market rout, with the S&P dropping 6% in a three-day period, was especially unsettling for employees trying to save for retirement and for current retirees, as well as for people socking away money to buy a home or make another big-ticket purchase.
The roller-coaster in stocks carries some key lessons for investors and consumers alike. First, expert say, it is important to resist the urge to join the herd of panicked investors rushing for the exit. Second, investors should be preparing for expected rate cuts from the Federal Reserve.
“It’s definitely been a big week for market moves — and also emotions,” Ainsley Carbone, a retirement strategist at UBS, told CBS MoneyWatch. “This is a time when you feel like you want to take action, but this is typically the time when you shouldn’t take any action.”
Here are five lessons from investment experts about this week’s market swings.
Don’t try to time the market
Market timing, or trying to buy and sell stocks to capture gains and avoid losses, is notoriously difficult and can lead to lost opportunities, Charles Schwab research has found.
This week’s wild swings are a textbook example. An investor who sold during the market selloff on Monday likely wouldn’t have foreseen the market snapback only three days later, when the S&P 500 rose 2.3%. As of Friday afternoon, the index has largely regained its losses from the rout earlier in the week.
“A lot of times people think, ‘This is definitely the time for me to sell,’ but you have to to make a decision about when to get back into the market, and that can be even more difficult,” Carbone noted.
Have a long-term plan
Develop a long-term plan for your investments and retirement savings, and stick with it, said Alex McGrath, chief investment officer for NorthEnd Private Wealth.
“No. 1 is I would tell you to turn off the TV so you don’t get Jeremy Siegel screaming on CNBC that we need 150 basis points of emergency cuts,” McGrath said, referring to the Wharton economist’s call earlier this week for the Fed to execute an emergency intra-meeting rate cut followingf the market rout.
Sticking with your long-term investment and broader financial goals can help you avoid making knee-jerk reactions like selling stocks when everyone else is panicking, he noted.
“The day-to-day market moves don’t matter as much” when you stick with your investment plan, McGrath said.
Similarly, avoid the temptation to check your portfolio frequently, especially if you tend to react emotionally to seeing the impact of a market downturn on your portfolio, Carbone advised.
Volatility is normal
Periods of heightened volatility like the market experienced this week are normal, noted Kevin Khang, head of Vanguard’s global economic research team.
“For most people who are saving for retirement, the investment horizon is much longer than a year. So these episodic volatility events have a way of working themselves out,” he told CBS MoneyWatch.
Sharp swings in the market usually recede over a period of weeks or months, although some experts note that discrete events can also cause volatility to spike, such as the U.S. presidential election and conflict in the Middle East.
Watch the economic data
Although experts caution against obsessively checking your portfolio or trying to time the market, McGrath does recommend that investors keep tabs on broad economic data to monitor the health of the U.S. economy.
That may be especially important at a time when some economists see mounting risks that U.S. could slip into a recession.
“Definitely keep an eye on the macro data — it serves as a good guidepost, and it’s available,” McGrath said. “You can you can look at the underlying economy and that should help everyone in their allocation goals,” such as whether to shift investments into different types of assets.
Prepare for Fed interest-rate cuts
Following this week’s extreme market volatility and uneven economic data, the Fed is widely expected to ease rates in September, which would marking the first cut since March 2020.
Cutting the federal funds rate could result in lower yields for savers, who have benefited from high-interest savings accounts and certificates of deposit during the last year given that the Fed’s benchmark rate has held steady at a 23-year high since July 2023.
As a result, savers might want to look at ways to lock in those higher yields ahead of the Fed’s September 17-18 meeting, Carbone said. For instance, some experts recommend buying a long-term CD before next month to capture those high rates.
Likewise, rates for mortgages and auto loans could follow the Fed’s move, providing an opportunity for buyers who have been sidelined by high borrowing costs to reenter the home or auto market.
Interest rates “could move back significantly in the next six months,” McGrath said.