The stock market is going nuts. Without going into too much detail, let's just say that the Dow Jones just dropped over 1,000 points in one day.
When you combine this with bitcoin's dive and Tesla's plunge, it looks like the economy is taking a turn for the worse. But what does this mean? And how should you react?
First of all, don't panic. The overall US economy is still healthy and shouldn't have any major problems in response to what's happening on Wall Street.
That being said, you might want to start cutting back on your spending until things stabilize. And if you're looking for investment opportunities outside of stocks, consider putting your money into gold or bitcoin futures instead.
The recent stock market plunge and its impact on the overall economy
What is happening on Wall Street is very complicated to explain. However, here are a few key things to know.
First of all, the most recent stock market dip is a result of the Fed raising interest rates. When the Fed raises rates, the interest that a bank pays on their money goes up.
That means banks are making less profit on their loans, and they're not in a position to make as many loans as they normally do.
The Fed is also raising rates because it thinks that the US economy is strong enough to withstand higher interest rates. But when interest rates go up, that causes bond yields to rise as well.
The implications of the Dow Jones plummet
By the way, there's a decent chance the Dow Jones will go even lower in the short term. A lot of these big institutional players use a 1-week trading window, and at the moment, a lot of them are still on holiday.
In other words, institutional investors are hesitant to buy stocks right now and can't make any trades at all due to low volume.
That means we're going to see these big players sell out of their positions at a relatively fast rate, sending stocks much lower over the next couple of days.
So I wouldn't be surprised if the Dow Jones falls down to as low as 12,000 before things stabilize.
Of course, this could all change if the Federal Reserve decides to increase interest rates. The last time the Fed raised rates in March, the Dow Jones fell 665 points in a single day.
How to react to a market crash
Now that you know what to expect from a market crash, here's what you should do if you're a local investor in the stock market.
For one thing, you'll need to do your research. After a big plunge like this, there's usually a good reason why stocks are crashing. So if the reason doesn't hold up, there's no reason to panic. You'll just have to wait it out.
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The same goes for cryptocurrencies. Bitcoin's price is dropping, for one thing, but a lot of other digital currencies are going through the roof.
So if you think that bitcoin will come crashing back down soon, you probably aren't making the right choice. Instead, consider investing in some other alternative currency, like ethereum or bitcoin.
Investing in gold and bitcoin futures
It's always smart to have an allocation to gold in your portfolio. Gold is used to protect wealth against inflation. And there are three reasons why the price of gold can appreciate over time:
- China's gold consumption
- Global demand for gold
- Corporate investment in gold
Despite the fact that gold hasn't been trading on the stock market for decades, it has been trading on the futures market since 2005.
And this market has huge growth potential as investors look to cash out of a stock market that is climbing to new heights on the back of the bull market in stocks.
While bitcoin and gold have had huge booms in the past, the reality is that they tend to go in cycles. These cycles can be defined by their birth and death dates.
What other investments should you consider?
Cryptocurrencies and gold are the two strongest performers of 2018 so far. So far, the price of bitcoin has taken a nosedive from its all-time high of almost $20,000 a coin.
It's currently hovering around $9,200 after peaking in November at over $19,000. And gold has had a great year too, trading at a 16-month high above $1,290.
At the end of December 2017, the yellow metal was around $1,163, so it's doubled in value over the past year.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
Conclusion
There's been a lot of political uncertainty around the world over the last few months, and things seem to be getting worse instead of better.
That's why the global financial markets are reacting in a very unpredictable way. While there's no need to panic, there's also no need to go hog wild and ignore the signs.
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