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Here’s why the stock market is down and what you should be doing now

Nonetheless, as much as possible, it’s important to understand what’s going on on Wall Street, including the basics of why the stock market has fallen. While you shouldn’t view Wednesday’s move as a market change, you might want to take this moment as an opportunity for a gut test.

Here’s what you need to know and what to do.

Why has the stock market fallen?

As often happens, after a big market move, Wall Street traders offered several explanations for what happened to the stock market on Wednesday.

One has to do with President Trump’s trade war with China. While the Trump administration has been talking about China for months, it raised the bar in late September by imposing a 10% tariff on $ 200 billion in Chinese consumer goods. Chinese tariffs are expected to climb 25% in January. The trade stalemate could hurt US and Chinese businesses, by increasing production costs and reducing consumer spending. As the US stock market fell this week, China’s two major stock markets were hit even harder, with Shenzhen falling 6.5% and Shanghai 5.2%.

However, the trade war was not the only thing investors were reacting to. Also at the end of September, the US Federal Reserve raised interest rates for the third time this year. These measures are aimed at preventing inflation, which has finally started to rise as the US economy grows. Since the Fed’s rate hike, 10-year Treasury yields, which have spent much of the year below 3%, have jumped to nearly 3.2%. Higher interest rates hurt stocks by making bonds a comparatively more attractive investment and making it more expensive for companies to borrow and invest.

What to do about the falling stock market today

The correct reaction to a one-day market move is, of course, to do nothing at all. While it is possible to identify some of the political and economic factors that Wall Street traders were reacting to, no one knows where the market will go from here.

After all, it wasn’t until February that the Dow Jones plunged 1,175 points in a single day – the biggest drop in points in history. Soon after, the stock market quickly recovered and hit new highs.

Additionally, as traders attribute the latest Dow Jones cut to rising interest rates, this should be good news in the long run. Remember: The Federal Reserve is acting because the economy is so strong it risks overheating. In other words, this could all turn out to be another incident.

Still, while it’s impossible to predict how big – if any – the stock market downturn this week will have, you should be aware that sooner or later stocks will face a sell off. The current bull market – now nine years old – is the oldest in history. Investment professionals have been warning for months that the US market is overvalued. Indeed, the S&P 500 is trading at 33 times its long-term average earnings – a higher level than at any time in history, except just before the dot-com crashes of 2000 and 1929. (This no. Perhaps it’s no coincidence that US tech stocks, which had dominated the market, were among the hardest hit on Wednesday, down nearly 5%.)

Are you really feeling a burst of panic right now? The answer should be “no”. But if it’s ‘yes’ then maybe you should consider selling some of your stocks and replacing them with bonds.

Just because the last massive sell-off is a sure-fire sign doesn’t mean the next bear market is upon us. This is because when the bear finally arrives, you will likely experience the same sense of panic. Therefore, it is better to make this move now, when stocks are still a few percentage points from all-time highs, rather than later when they have fallen 10%, 20% or more.

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