Add Category
You may have noticed that the stock market has been on a tear. In November, the S&P 500 index – which represents about 80% of the US stock market's value – cracked the 6,000 mark for the first time in history. Earlier this month, the S&P 500 and Nasdaq each hit record highs.
If you're wondering what's driving the stock market right now and whether the momentum can continue, you're in the right place. We'll explain some factors affecting the stock market, like the election and the Federal Reserve's recent rate cuts, and help you decide whether now is the time to invest.
What's affecting the stock market right now?
The stock market is basically a marketplace where you can buy and sell shares of a company. If the company performs well, the stock price rises and you could earn money; if it performs poorly, you can lose money. However, there are a lot of other outside factors that are currently impacting the stock market's performance.
Election
Stocks rallied immediately after former President Donald Trump won his re-election bid, although it's fairly typical for the stock market to get a bump after the election. But on Nov. 6, the day after election day, the S&P 500 notched its best day in two years, suggesting that investors are bullish about a second Trump presidency. The Dow Jones Industrial Index and Nasdaq composite jumped by 3.6% and 3%, respectively.
"The market's a forward-looking mechanism," said Dan Beech, wealth manager at Simple Wealth, who's based in Oak Park, California. "It sees a pro-business environment with the new administration coming in."
But some of that post-election surge may reflect the fact that the stock market simply preferred the stability of having a clear winner quickly.
"The election was more decisive than investors thought it would be," said Joseph Sroka, a chartered financial analyst and chartered market technician who serves as chief investment officer at NovaPoint Capital in Atlanta. "When that uncertainty came off the table, it put some force behind the rally playing out."
The day-after surge faded rather quickly when stocks took a tumble later that week. But there were additional factors that likely influenced stock price fluctuations, including the Federal Reserve.
Fed interest rate cuts
The stock market tends to respond positively when interest rates are heading downward since it makes borrowing less expensive for consumers and businesses. The Federal Reserve Board trimmed interest rates by a quarter point when it met during the first week of November and another quarter point this month.
Yet stocks tumbled following the November rate cut and in anticipation of the most recent cut. So what gives?
Fed Chair Jerome Powell has indicated that the board would be cautious about rate cuts, noting that the economy "is not sending any signals that we need to be in a hurry to lower rates." Powell's comments provided a reality check for investors who were banking on aggressive rate cuts going into 2025. At the December meeting, the Fed reduced the number of cuts it was predicting to make in 2025.
"The Republican party swept the election, and part of their platform was that they'd lower regulations and, potentially, taxes, which would be positive for corporations and their earnings," Sroka said. "But then we saw Jerome Powell maybe tap the brakes a little bit because interest rate reductions may not come as quickly as investors had hoped."
Other potential factors affecting stocks
The pro-business agenda of the incoming Trump administration and interest rate changes aren't the only factors driving the stock market's performance. Here are some other things to watch:
- Earnings report: Not surprisingly, strong earnings reports usually send stock prices higher. As of Nov. 22, about 95% of S&P 500 companies had reported earnings for the third quarter of 2024 -- and more than half beat analyst expectations.
- Trump's proposed tariffs: Trump pledged to impose sweeping new tariffs on foreign goods, particularly on goods imported from China. Economists are typically against tariffs, arguing that they lead to higher prices for consumers and overall inefficiency. But there are still many question marks about the actual extent of Trump's tariffs, including how quickly they might be implemented and which countries would be included.
- Geopolitical uncertainty: Geopolitical uncertainty is usually bad for the stock market. But despite the ongoing war between Russia and Ukraine and a ballooning Middle Eastern conflict, US stocks have been largely unaffected in 2023 and 2024. Still, escalating conflicts could have a greater impact on the stock market, particularly if they result in shocks to the supply chain.
Should I be investing in the stock market right now?
Investing in the stock market can be risky. But not investing in stocks can also be risky. Without the stock market, most people wouldn't be able to amass a large enough nest egg to retire.
You have a lot of options if you want to invest in the stock market, and you don't necessarily have to pick just one company. In fact, most experts agree that some of the smartest ways for beginners to invest are through funds that are composed of multiple stocks and bonds, like electronically traded funds and mutual funds.
If your company offers a 401(k), most experts say it's essential to at least invest enough to get the company's matching contribution -- so if your company matches up to 2%, for instance, you should invest at least 2% of your pre-tax income. It's typically simple to sign up and choose from the brokerage's plan options, and you can roll over your plan to another one if you change employers. Even a small amount from every paycheck can help you build a nest egg for retirement.
If you're already putting money aside in your 401(k) or other retirement plan, then you may be wondering if you should put additional money into the stock market so you can grow your money now. Here are some questions to ask to help you decide.
Do you have emergency savings?
The stock market goes up and down. If you need to cash out investments when they're down, you could lose money. You may also incur a 10% tax penalty, plus regular income taxes, if you're withdrawing money early from a retirement account.
That's why building an emergency fund before you invest is typically recommended. Aim to build a cushion with three to six months' worth of savings to cover expenses if you lost your job or had a medical emergency. Even though interest rates have dropped, a high-yield savings account is still a great place for your emergency fund since it's not affected by stock market volatility and your deposits are federally insured.
When do you need the money?
The stock market has a good track record of building wealth in the long term, but short-term returns are unpredictable. For that reason, it's important to consider your time horizon, or when you expect you'll need your money. A good rule of thumb is to keep any money you expect to need within the next five years out of the stock market.
What is your risk tolerance?
If your blood pressure goes up every time the stock market has a bad day, you may want to sock away extra money in a savings account or certificate of deposit so you have even more than the recommended emergency savings.
What else is in your portfolio?
You typically don't want all your money invested in the stock market. Having a small amount of your portfolio in historically safe investments like bonds and CDs provides a bit of a cushion from stock market volatility, particularly for those nearing retirement. If you're not sure what the right mix of assets is for you, consider working with a financial adviser or using a robo-adviser service.