Can the stock market keep setting records and what about inflation?

Many investors are wondering when the bottom will fall out for both the stock and real estate markets. We know people who “called the top” and sold their personal residences with the intent to rent for the time being and then buy another house once the market normalizes. With the Dow Jones and S&P 500 setting new records seemingly every day, many investors are leery of buying in at all-time highs, but are also fearful of missing out on potential gains.

With the confluence of all these events, it is important to understand how the government’s monetary and fiscal policies influence the stock market. The Federal Reserve Board (“Fed” for short) seeks to avoid recessions and curb inflation by changing interest rates. In the beginning of the pandemic, they lowered interest rates to avoid a recession. This allowed Americans more borrowing power and enabled them to secure mortgages to buy bigger houses and drive-up prices in the real estate market. It also encouraged them to put their money into stocks which were producing 15-40% returns while bonds were flat, if not losing value.

This has driven up the stock market to all-time highs, but what goes up must come down. Now the Fed is seeking to curb inflation and the way they do that is to raise interest rates. Raising interest rates will have the opposite effect of before—mortgage rates will be less compelling, houses will not sell as fast, bonds will be attractive again, and stocks will be less attractive than before. This process may take 2-3 years, but it is coming. The Fed is making incredibly wise moves to control the American economy behemoth, but they are not all-knowing. They will most likely not change interest rates dramatically until they are forced to, and that is when the stock market correction will happen.

So, what should you do right now as an investor? Do not sell out of the markets just yet. You never want to time the market. If you sold out this time last year, imagine how dumb you would feel missing out on that 30% gain. Rather, you should rebalance your portfolio. If your equities holding has exceeded its target percentage of your portfolio, then sell off the excess and invest it in your lower percentage asset classes such as bonds, precious metals, real estate, or commodities. This rebalance will limit your losses in a correction and lock in your gains by buying low and selling high on those less attractive asset classes right now.

If you are unsure of how to navigate these issues, talk to a knowledgeable CERTIFIED FINANCIAL PLANNER™. Our planners at American Financial Planning are knowledgable, expert guides who can give you the unbiased, professional advice that you need. Give us a call today for a free consultation.

As a financial advisor Daniel is passionate about helping people achieve their dreams and greatest potential in life. He enjoys strong coffee, thick books, and long bike rides in his hometown of Roanoke, VA.

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