With the recent drop in the stock market, many investors and analysts are calling this the end of the bull market. They are seeing a complete shift in the market and in the economy as a whole. But you don’t need to worry. The end of the bull market is overblown.
Why do I say this? The simple answer is the reasons we are seeing the decline or volatility in the market are not due to factors that signal the end of a trading market, regardless if that is a bull market or a bear market.
In this post, I’ll walk you through what is happening and why it is happening. Then I’ll show you why this isn’t the end of the bull market run we are in.
3 Reasons Why The End Of Bull Market Isn’t Now
#1. Rising Interest Rates
The Federal Reserve has been raising interest rates now for a while and they plan to do so for the coming months until they get interest rates back to neutral. What does this mean?
During the last recession, the Federal Reserve helped to keep more damage at bay by having the ability to lower interest rates. By lowering rates, people and businesses could borrow money at a lower cost.
Now that the economy is doing well, they want to raise interest rates back up into the 3% range. The reason is so that when the next bear market does come along, the Fed will have a weapon in its arsenal to help deal with the slowing economy.
The Fed feels confident in raising rates because of the strong economy. If they were seeing a slow down coming or lower inflation, they would back off. But they don’t see either of these things, therefore they are continuing to raise rates.
In other words, they see the strong economy and bull market continuing.
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#2. Shifting Risk
As a result of the higher interest rates, we are seeing people shift money from stocks to bonds. To understand why this is so, we have to look back to the last recession again.
The Fed dropped interest rates and as a result, income investors were having a tough time earning interest on bank accounts, certificates of deposit, and even bonds. In order to get the return they needed, many poured their money into high quality, dividend paying stocks.
Even though these companies are good, strong names, investing in stocks is always riskier than investing in bonds. So now that interest rates are climbing, many of these investors are leaving stocks and heading back to bonds.
The end result is a dropping stock market and a rising bond market.
And this is a good thing. People know their risk tolerance and are doing the right thing for their money. As a whole, this is good for the market too. If bad news does come out and the market sells off, the drop won’t be as severe. This is as long as many of the investors who were invested in stocks due to low interest rates have moved back into the bond market.
#3. Corporate Earnings
Finally, we are coming upon another season of corporate earnings. These numbers will be the true test as to whether or not the bull market is nearing an end. Expectations are for another strong season of earnings.
It will be interesting to see what the numbers are and what happens to the companies that miss expectations. Also interesting will be future guidance from these companies over the coming months.
This information will be a critical piece to the pie in regards to the future of the bull market and the market as a whole.
At the end of the day, calls of the end of the bull market run are overblown. The rising interest rates are a good thing as it is helping to get investors who don’t want to be in the stock market back into bonds.
And for investors who do want to be in the stock market, this is a nice pullback that allows you to buy more shares of companies you love at a more reasonable valuation.
Is the selloff over? I can’t say for sure. But I do expect more investors to shift money out of stocks and back into bonds in the coming weeks and months. If they do this gradually, then we won’t see wild swings in the market.
But if they all decide to move at once, you can expect to see large declines in the stock market.