Hello, Quartz Index readers!
I’ve been studying markets for a long time. People’s short memories never cease to amaze me. The US stock-market turmoil this week erased all the gains accumulated so far this year. That would be really terrible—were it not the beginning of February.
Consider that the market was on a rampage beforehand: It’s risen almost 40% since the last correction ended in early 2016. Today, the S&P 500 is at about the same level as it was in mid-November.
The last few years were remarkable because the stock market kept going up and never seemed to fall. Investing in the stock market started to seem like a sure bet: put money in and get a steady 10% return each year.
Economist Tyler Cowen speculates that global wealth and a lack of stable assets like treasuries has led investors to view the stock market in the developed world as the new risk-free asset. That may be true, but stocks are still risky. They represent a claim on future profits. Unlike bond payments for a rich country who pays its debts, future profits are uncertain and so are stock prices.
The explanations for why this turmoil is happening now—some argue that a booming economy will bring back inflation, interest rates will increase, and this will lower stock prices, while others speculate that the current tax plan was a step too far—may be true.
But the most likely explanation is more simple. The stock market is risky. Some days it drops. Which days those will be are unpredictable. Higher average returns is our reward for tolerating these days. This is why as tempting as high steady returns may look, it is never a good idea to put money you’ll need in the near future in the stock market. —Alison Schrager
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