Stock Market Is Getting Better but Inflation Remains a Problem – How to Get Protected from Coming Drops?
The United States, Europe, Asia Pacific, and the rest of the world have recorded some of the highest interest rates in decades. For instance, in the 12 months that ended October 2022, the U.K. has seen consumer price levels hit 9.6%.
The stock market in the US hasn’t been spared either. Over the year, stocks of tech companies such as Amazon, Google, and Meta (Facebook), have seen their prices slashed by huge margins. Traders and investors have had to revise their stop loss and take profit order limits to ensure they don’t expose their positions to a lot of risks.
Why The High Rate of Inflation
Inflation is a general measure of increases in the price levels of select consumer goods. In the United States, the consumer price index, the measure of inflation, comprises four major categories: food at work and school, food at home, energy, and all items less food and energy.
With the 9.6% increase in price levels, it means, a basket of goods and services that cost £100 in October 2022, now costs £109.6. Such an increase impacts the cost of living, pushing households into difficulties.
The top contributors to the high inflation levels are mainly food, energy, and housing. In an average consumer budget, housing takes up about 19%, while energy and food take up 15% and 17.1% respectively.
Even when you look at core inflation which strips out energy and food, you’ll still conclude that inflation is still broad-based. Economists use core inflation to try and project future inflation trends. To give you a peak of how widespread the inflation print is, October 2022 saw core inflation hit 6.5%. This was the highest number since March 1992.
Impact of Inflation on The Stock Market
When inflation levels are high, consumer spending numbers fall. This means demand for company products goes down, revenues suffer, margins fall and hence stocks become generally unattractive. The result is falling stock prices.
Rising inflation also triggers the Bank of England (BOE) to swing into action and tighten the monetary policy to try and bring down price levels. On November 3, 2022, the bank of England raised the base lending by 75 basis points. This hike was the highest in 33 years.
High-interest rates raise the cost of borrowing whether through credit cards, mortgages, or auto loans. High finance costs lower consumer purchasing power and heavily impacts companies’ revenues and earnings.
Similarly, a high-interest rate environment makes it hard for companies to service their existing debts or borrow to finance future production. This means lower production levels, high costs of production, and squeezed margins. The bottom line is volatile stock prices.
Compared to value stocks, growth stocks are the most impacted in a high-inflation- high-interest rate environment.
How to Stop Loss and Take Profit Can Optimise Your Trades
As a trader in a volatile market, you need money management techniques that help you to maximize gains on your positions and minimize losses when they occur. Stop loss and take profit are two of the must-have tools in your trading toolbox.
Stop Loss Order
A stop-loss order is an instruction from a trader to a broker to execute an order when the security falls below a certain price. The aim of a stop-loss order is to help the trader minimize losses on a security position.
Assume you have taken a position on Unilever (ULVR) stock currently trading at £4,168.50. Immediately after the purchase, you enter a stop loss order at £4,150. This means when the price falls below £4,150, your ULVR security position will be closed at the prevailing market price.
Take Profit Order
This order is the opposite of the stop loss. It helps traders exit a position before their gains are erased. Assume you open a position with HSBC (HSBA) currently trading at £ 497.20 and enter a take profit order at £499.50. This means when the price crosses the £499.50 mark, a sell order is executed to take out a profit.
The BOE is currently on a 75-basis points rate hike level, and no one can tell when exactly it will pivot. With such uncertainties and the whipsawing traders are witnessing in the stock market, it makes absolute sense to have safeguards on either side of the spectrum. Stop loss and taking profit orders can help stay covered.