How to navigate the uncertainty of the stock market: Tips for novice investors
Equity markets are once again facing high volatility, which can be challenging for novice investors to understand and make decisions. The VIX index, often referred to as the “fear index”, gained 9% during yesterday’s session, confirming the nervousness in the market. How to react to this situation and what should a novice investor know?
What is happening in the markets today?
The best-known US index, the S&P 500, is down 1% today, while the technology-focused Nasdaq has lost 1.3%. This follows the events of 18 December, when the US Fed (the US central bank) updated its projections related to interest rates. Their monetary policy actions suggest a tightening, which the markets see as a long-term negative factor.
In addition, the S&P 500 index has rejected the key technical level of 6044 points and is forming a short-term downtrend. If the market closes below the 5846-point level, it could fall further to around 5600 points. This could bring further losses but also potential opportunities.
How to react to volatility?
Volatility, as measured by the VIX index, signals that investors are nervous. For beginners, it can be difficult to decide whether to invest or stay away in such conditions. The key is to have a clear strategy:
Think long-term: Short-term fluctuations are common in the markets. Historically, markets often recover after corrections, which can present buying opportunities.
Watch technical levels: Levels like 5846 points on the S&P 500 can indicate important turning points in the market. If the market holds this level, it may recover. If not, further declines should be expected.
Consider diversification: don’t bet everything on one sector or asset class. For example, today’s declines were not only in equities, but also in gold, which lost 0.84%. Bonds, on the other hand, have shown a decline in yields, which may be a signal to consider adding them to your portfolio.
What are the broader implications?
Several factors are influencing today’s market:
Fed monetary policy: Higher interest rates may slow the economy, pushing down stock prices.
Strong correction as an opportunity: corrections greater than 3% have been relatively rare in recent years, but statistically tend to be a good entry point into the market.
Global influences: the European DAX index outperformed the US indices today, but still fell 0.7%. Movements in the EUR/USD currency pair (-0.4%) suggest a weakening of the euro against the dollar, which may impact European investments.
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