Weekly Buzz: 📊 Why the markets are jumpy right now

17 November 2023

If you've been keeping an eye on the markets lately, you've probably noticed that they’ve been jumpy over the past few weeks. Case in point: the S&P 500 index has climbed more than 7% since the start of November.

So, what’s happening here?

Positive data has boosted investor confidence

Since late summer, both global stock and bond markets had been on a downward slide, driven by stronger-than-expected economic growth and stubborn inflation. But since the end of October, economic data started to turn a positive corner, and the US Federal Reserve has started to take a more dovish tone. With this, financial markets abruptly reversed course.

One key piece of data: US core inflation – which excludes more volatile food and energy prices – just cooled to its lowest annual rate in two years.

There's now a growing optimism that the US central bank’s fastest monetary policy tightening campaign against inflation since the 1980s might now start to wind down.

Alongside data which point to a surprisingly robust US job market, it’s looking more likely that the world’s largest economy can manage a soft landing, beating back inflation while also narrowly avoiding a recession. If that scenario were to pass, it’s likely many other economies will benefit from America’s momentum.

And investors have responded positively to the influx of positive news, with many other stock market indexes trading sharply higher over the past few days. But it might still be a little premature to celebrate; inflation’s still above the Federal Reserve’s 2% target, after all.

What’s the takeaway here?

The past few months underscore how quickly investor sentiment (more on this in our Jargon Buster below) can shift, especially in today's uncertain economic environment. In such volatile markets, it's critical to stick to a plan and resist making snap decisions.

Instead of trying to time the market, a smarter approach is to stay invested in a well-diversified portfolio (shoutout to our General Investing portfolios) and use dollar-cost averaging, or DCA. That means investing a fixed amount at regular intervals, regardless of market fluctuations. This smooths the impact of sudden market changes and can benefit you by allowing you to get more bang for your buck when prices are lower.

It's a steady and practical way to navigate uncertainty in investing, and can help you take advantage of the longer-term benefits of staying in the market.

📰 In Other News: The Bank of Japan finally loosened up

Faced with worries about inflation, the Bank of Japan (BoJ) is now beginning to throttle back its monetary policies after years of extraordinary measures.

Japan’s economy has been stuck in the mud for decades, and the country’s central bank has battled that deflation with “yield curve control” since 2016. The tactic involves keeping both short and long-term interest rates low, aimed to get the country shopping.

That worked a little too well though, so faced with above-target inflation, the BoJ loosened its grip on 10-year government bond yields – a key long-term interest rate – a few months ago.

And now that the central bank has removed a rigid upper limit set on the 10-year yield, investors can have a bigger impact on its rise and fall. The 10-year government bond yield hit its highest point in nearly nine years after the announcement.

Investors may want higher returns for the increased uncertainty involved in holding Japanese bonds, which should have the ripple effect of increasing interest rates. And because higher rates would also make the country’s currency more attractive to foreign investors, a fresh flush of popularity could prevent the yen from falling any further.

This article was written in collaboration with Finimize.

🎓Jargon Buster: Investor sentiment

Like a weather vane, investor sentiment can tell us which way the wind of market trends is blowing. Basically, it’s the overall mood of investors towards the financial markets. It's influenced by a bunch of factors like economic reports and global events. This sentiment can sway markets, as it can drive investors to either buy more (when they're feeling bullish or positive) or sell off their holdings (when they're bearish or pessimistic).

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