Q. What’s with all this volatility in the market lately?
A. It’s been a strange, tough few weeks in the stock market. From the crisis in Greece to the Gulf oil spill and the bizarre 1,000 point “flash crash” in the Dow, there are plenty of reasons the market seems uncertain.
Take inflation. Two months ago, inflation was the most predominant concern among many investors. You’ll remember inflation is a general rise in the price level of various goods and services that can be caused by an increase in the supply of money. You may also remember that both the Federal Reserve and the federal government recently pumped huge amounts of money into the economy to recover from the credit crisis and ensuing recession. So with inflation such an obvious risk, why, then, are some investors starting to become concerned about deflation again?
Well, an odd thing happened while we were waiting for inflation to show up. The Euro, the primary currency of Europe, began to fall in value as a result of the recent bailout in Greece. As the Euro falls, the value of the U.S. dollar increases – at least on a relative basis. And because commodities like oil, gold and grains are priced in the dollar in international markets, a stronger dollar means you can buy more of that commodity for the same buck, so commodity prices tend to drop. Except, well, for gold, which usually moves in the opposite direction of the dollar, but has instead recently reached a record high.
Confused yet? So is the market. It can be hard to stay on top of it all. Here’s the thing, though – you don’t need to in order to be a successful investor. In fact, instead of worrying about all this volatility, some investors actually welcome it. Buying high quality, high return companies at prices well below what they’re really worth offers you the best chance to grow your wealth long-term – regardless of the inflation rate. So if you’re tired of the noise, I’d encourage you to think about becoming a value investor. There’s plenty of room.