2 Massive Reasons Behind the Current Market Slump

2 Massive Reasons Behind the Current Market Slump

US stocks have taken a beating in recent months. We investigate what experts believe the 2 main reasons behind the current market slump are.

Investors are panicking as economists, federal agencies, and intergovernmental organizations continue to release cautions about the world’s current and future economic conditions. With all this noise, it is difficult to know what news is critical, fearmongering, or worse — misinformation. 

Two of the biggest reasons behind the current market slump appear to be the ongoing war in Ukraine and the Federal Reserve’s inflation policy. 

How is the war in Ukraine affecting stocks?

JPMorgan chief executive Jamie Dimon warned on June 1st that the war in Ukraine will continue to pressure global commodity markets, especially food and oil. Dimon claims that oil “almost has to go up in price” and estimates that the price of crude could reach $150 or $175 per barrel. The view is strengthened by an OECD report stating the world will pay a necessary but “hefty price” for supporting Ukraine against the Russian invasion. This will impact food prices significantly, as diesel is a leading input in food production. 

Ukraine is also a prominent exporter of grain and sunflower oil. However, due to mines in the Black Sea and the presence of Russian ships, it is unlikely that much of this product will leave the country. The decline in exports will further increase global food prices following adverse weather conditions that have already negatively impacted global harvests this year. 

How will Federal Reserve policies affect the stock market?

Dimon also warned of the risk of market volatility as the Fed executes its policy of quantitative tightening. The procedure began on June 1st and involves the monthly sale of $95 billion in bond holdings. He states that this is something we have never seen before and will be recorded in history books for decades. Dimon explained that the Fed has no choice and “they have to remove some of the liquidity to stop the speculation, reduce home prices and stuff like that.” 

This is a view shared not just by Mr. Dimon, however. According to a recent poll by the Financial Times, 68% of the economists questioned believed that Fed policy will lead to a recession in 2022. One economist from George Washington University, Tara Sinclair, even declared “this is not landing a plane on a regular landing strip. This is landing a plane on a tight rope, and the winds are blowing.” This is alarming news for investors, who may have already made considerable losses from the recent market sell-offs. 

What can investors expect in the near future?

Many economists remain pretty gloomy about US growth, with the majority expecting a recession in 2023. The above factors indicate that there is still a lot of pain expected in the financial markets. To combat this, investors must diversify their portfolios by thinking of dividend-paying or cash-generating stocks. Remember, a long-term buy-and-hold strategy allows you to look past this short-term volatility and focus on companies you truly believe will beat the market.

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