Stock Values Just Plummeted. Should You Be Worried?

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KEY POINTS

  • The U.S. economy grew at a faster pace than expected during the third quarter of 2022.
  • Oddly enough, that sent stocks spiraling downward.
  • If you're investing for a long-term goal like retirement, keep some perspective about the drop. 


The market fell, but for a surprising reason.

For months on end, there's been talk that a recession could hit in 2023. But despite those warnings, the economy seems to be holding steady. 

In fact, on Dec. 22, the Commerce Department released data on economic growth, and lo and behold, during the year's third quarter, gross domestic product grew at an annual pace of 3.2%. That represented faster growth than expected. 

Now, you'd think that would be a good thing. After all, growth is good, right? 

But investors weren't happy about it. Following that announcement, stocks took a tumble, with all major market indexes dropping in value. And if you're surprised by that turn of events, you're no doubt in good company.

Why did stocks sink?

One of the hardest lessons investors sometimes end up learning is that stock values have the potential to fall even in scenarios where you'd expect the opposite to happen. It makes sense to assume that strong economic growth would send stock values upward. Instead, investors got scared thinking that an uptick in economic growth might lead the Federal Reserve to implement more aggressive interest rate hikes. 

It's those rate hikes that have the potential to spur a recession. The Fed specifically wants to encourage a pullback in consumer spending so the gap between supply and demand that's led to rampant inflation can close. But the Fed might cause a major reduction in consumer spending with its rate hikes, not a modest one. And if that happens, it could lead to very unfavorable economic conditions in 2023.

Should you stress if your portfolio just lost value?

It can be disheartening to see losses in your brokerage account or IRA, especially on the heels of what would seem like positive economic news. But remember, the stock market is just plain fickle like that. And while it may have had a negative reaction to one piece of news, it also has the potential to rally in response to another piece of news.

In fact, if you're investing for a far-off goal, like retirement, then daily fluctuations in your brokerage account or IRA really shouldn't be a source of concern for you. They may be annoying and frustrating, but try to remember that you really only lose money in the stock market if you unload investments at a price that's lower than what you paid for them. So if you resist the urge to dump your stocks when their value drops, you won't lock in any losses.

Meanwhile, in the coming weeks, we're apt to see our fair share of economic data get released, from national unemployment levels to the Consumer Price Index's latest reading, which is a key measure of inflation. It's hard to say how the stock market will react to each piece of news, whether it's positive or negative. So the best thing you can do is pledge to keep your cool and not react, even if your portfolio takes a dive for what seems like a very silly reason.

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