Don’t Panic: Market Volatility Is Totally Normal

Ups and downs can feel confusing and frightening, especially if you're new to investing or approaching a major financial milestone. But volatility isn’t random or mysterious. In fact, once you understand what causes it, the market might seem much less intimidating, and you might even learn to take advantage of the fluctuations.

For now, though, let’s assume you are like many others who feel that volatility causes you to question your decisions or fear that you’re “doing something wrong.” These basic principles can help you understand what moves markets, which in turn helps you stay grounded and build confidence as an investor.

Company Performance: When Business Results Move Prices

One of the main factors influencing market changes is how well companies perform. When a company reports increasing sales, strong profits, or exciting new products, investors often become more optimistic, causing market prices to rise. Conversely, when a company reports lower earnings, layoffs, or slower growth, market prices tend to decline. Therefore, a key element in market movements is often the expectation of a company’s future performance, often based on current or past events.

Market Sentiment: How People Feel About the Market

Speaking of past, present, and future performance, emotions play a crucial role in market behavior. This general feeling is called market sentiment.

• When investors are bullish, they anticipate prices will go up.

• When they are feeling bearish, they anticipate prices will decline.

If enough people share the same sentiment, whether positive or negative, it can impact markets even if nothing significant has changed behind the scenes. That’s why headlines and social media buzz can greatly influence market prices.

Interest Rates: The Cost of Borrowing Money

Interest rates affect almost every part of the economy. When rates increase:

• Borrowing becomes more expensive

• Businesses face higher costs

• Growth may slow

• “Safer” options like CDs or money markets become more attractive

When rates decrease, borrowing becomes more affordable, leading people to spend more on major purchases, businesses might expand, and investors may invest in higher-risk assets to seek better returns, all of which could drive market growth.

Market Cycles: The Natural Rhythm of Investing

Markets go through cycles. Although these cycles can sometimes be hard to recognize, the reality is they consist of periods of growth followed by periods of decline.

A basic cycle consists of:

• Accumulation: Prices stabilize after a decline; investors gradually resume buying.

• Mark-Up: Confidence rises more rapidly; prices trend further upward.

• Distribution: Some investors start selling, perhaps to secure profits; the market might stabilize.

• Mark-Down: Prices decline once more, often rapidly, eventually starting a new accumulation cycle.

These phases don’t always look neat in real time, but understanding them helps you avoid emotional decisions driven by short-term thinking.

Global Events: When the World Gets Uncertain

Anything that introduces uncertainty can cause market volatility; examples include elections, international conflicts, supply chain disruptions, cybersecurity threats, natural disasters, pandemics, or major policy announcements. These events impact trade, production, inflation, spending, and global relations, all of which influence the market.

Takeaway

Volatility is a normal part of investing. The market moves for different reasons, from company results to global events, but what matters most is keeping a perspective that matches your risk tolerance and long-term goals. When you understand why the market moves, the fluctuations seem less scary and easier to handle.

Disclaimer: Creek & Lyells Financial Literacy Foundation does not provide financial services, nor does it recommend or advise visitors to open accounts or buy or sell securities. All content on this blog is for educational purposes only. While we strive to provide accurate, relevant, and well-vetted information, visitors should consult a licensed financial professional and carefully evaluate the risks of any financial decision before taking action.