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The Santa Rally at the beginning of December seems like a long, long time ago. Today, stock markets are awash in a sea of red, and some predict that a The US stock market crash could be around the corner.
So what's going on? And what steps should investors like me take?
This is what happened
Hopes for sharp interest rate cuts in 2024 and 2025 have boosted global stock markets this year. Base rate reductions provide economic stimulus and reduce borrowing costs, boosting corporate profitability.
But more recently, stiffer inflation suggests that these extreme rate cuts might not be on the horizon after all. These suspicions exploded after the last meeting of the US Federal Reserve yesterday (December 18).
As expected, the central bank cut its reference rate again, from 4.5% to 4.25%. But Federal Reserve Chairman Jerome Powell warned that “From now on, it is appropriate to exercise caution and look for progress on inflation..”
Adding that inflation could take “another year either two“To reach the bank's 2% target, higher interest rates may last much longer than expected.
What's next?
As a result, stock markets have plummeted around the world. In London, the FTSE 100 fell to one-month lows just above 8,000 points today. Yesterday, the S&P 500 The US stock index fell to six-week lows.
Given that previous rallies were based on expectations of rate cuts, these pullbacks are not surprising. Even after the drop in the last 24 hours, the S&P 500 is still up 23% so far this year.
Could this be the start of a bloodbath? Many analysts say global stocks are overvalued due to issues such as China's struggling economy, possible new trade tariffs and signs of persistent inflation.
In this context, new falls could be around the corner.
this is my plan
Correctly guessing how stock markets will behave in the short term is a very difficult task. At any given time, stock prices are affected by a variety of macroeconomic and geopolitical factors. Surprises can also arise that shake asset values, as we just saw.
I guess a market crash is unlikely. But as I say, there is no way I can be sure.
But whether the short-term outlook is good or bad, my own investment strategy remains the same. Market turbulence is common, but investing in stocks still offers impressive long-term returns. Therefore, reducing my stock holdings makes little to no sense.
The S&P 500, for example, has provided an average annual return of 12.7% over the past decade. It has generated these huge returns despite issues such as the Covid-19 pandemic, rising geopolitical tensions and higher interest rates.
So at times like these, I look for bad stocks, funds and trusts to buy. and the iShares S&P 500 ETF (LSE:CSPX) is one I'm considering buying more of following the sharp drop in the index.
As the name implies, it gives me exposure to the entire S&P 500, which helps me spread risk. That said, it also has considerable growth potential due to its high weighting in technology stocks, including NVIDIA and microsoft.
With an ongoing charge of 0.07%, it is also one of the most profitable funds tracking the US index.
Past performance is not a reliable guide to future returns. But if the long-term performance of this iShares fund remains unchanged, an investment of £10,000 today would be more than triple to £36,365 within a decade.
