Stock market volatility can be a source of fear and confusion, but it also reflects how markets adapt to shifting conditions. It’s a normal part of the investing process.
Volatility measures how much and how fast asset prices move. In general, the higher the volatility, the faster and more pronounced price changes are.
Several key factors can drive stocks up or down. Economic data, earnings announcements and policy changes can all shift investor expectations. For example, a stronger-than-expected inflation report may trigger rate hike fears, sending stocks lower. A strong earnings report can boost investor confidence, sending stocks higher.
Global events can also spark volatility. For example, a crisis in a major world financial center can affect the economy and stock markets. A COVID-19 pandemic, war, or oil shortage can also cause uncertainty and prompt market declines.
Monetary policy changes can also impact investors’ expectations for future returns, particularly if they signal that the central bank may tighten or loosen interest rates. This can cause the stock market to react with greater volatility than would otherwise be the case.
While no investment portfolio is immune to volatility, working with a trusted financial advisor and practicing sound investing habits can help you reduce the effects of short-term market fluctuations on your long-term goals. By diversifying your investments, using dollar-cost averaging and staying focused on your overall financial plan, you can help ensure that the ups and downs of your portfolio don’t interfere with achieving your personal financial goals.