Time to retire? Absolutely, said some. Never, said others. After a year of research, I had my answer. Here’s what I know:
1. The stock market isn’t going to crater. And neither is the housing market, which is the only exception I can think of. All of the other major indices are in the green, with little variation in the long term. What does vary is the next month. What this means is that the market is vulnerable to a few key, short-term factors, which can put stocks under pressure. These issues include:
The current political environment. The market won’t necessarily tank if a Democrat is president. But if an incumbent is seen as likely to be reelected and doesn’t offer strong policy proposals, investors may be discouraged. The next president will need to give voters something for their investment dollars. It’s impossible to predict what could happen in the next 12 or 24 months, but there will almost certainly be a presidential election.
A government shutdown. It’s likely to happen. This is something to watch. In the best case scenario, the market could rebound in the future if the government were to reopen. In the worst case, the market would take a hit in the short term, and the U.S. would go into default. Another election could push it over the edge.
A rate hike by the Fed. If the market is in a prolonged downward spiral, a rate hike would likely trigger a spike in inflation. A rate hike would also likely trigger a spike in bond yields, which would also likely spike and give investors much higher levels of inflation risk.
Another presidential administration. The market is more resilient to the short term.
The impact of the Federal Reserve’s proposed rate hike. The Fed is preparing to raise rates next year at its January meeting. This would be the first rate hike by the Fed in seven years. Investors will react to this move in three ways. First, they will be surprised by the rate hike. If the Fed raises rates at one of our major economic recessions, investors will be happy — and the Fed will be able to avoid potential recessions in the future. Second, rates are already set; even if the Fed raises rates, the price of money will increase, lowering real rates and stimulating the economy. Investors love this idea because it could mean a new boom or a