Wednesday’s anticipated (and much debated) interest rate hike of 0.5% by the Federal Reserve is aimed at stemming the rising inflation rate by making it more expensive to borrow money. However, rate hikes are never a black and white issue and this could have broader impacts on the economy and financial markets.
Here’s our take on the Fed’s interest rate hike:
It’s not a market staller
It wasn’t that the Fed hiked 50 bps for the first time in 22 years (this is what most of the media focused on). Instead, it was that Fed Chair Powell, in his press conference, said that the Fed wasn’t actively considering hiking rates by 75 basis points.
That’s why the S&P 500 surged 2% during the final hour of trading.
It’s a headwind for stocks
For the past several weeks, we’ve been saying that there are three potential headwinds on stocks:
Growth worries from the Russia–Ukraine war.
Growth worries from continued COVID lockdowns in China.
Positively, one of those (Fed hawkishness) just got better. But for a sustainable rally, we’ll need to see improvement on all three.
We have been monitoring all the headwinds in this market since volatility started earlier this year. Markets remain volatile, but the Fed did provide a reason for some optimism over the medium and long term.
We want to make sure everyone understands what yesterday’s Fed decision means for markets because—today’s volatility aside (markets have given back all of yesterday’s 2%+ gains)—it was a mild positive and it’s important to understand whether the headwinds on stocks are getting better or worse because they will decide the next 10% move in the S&P 500.
It won’t cure market volatility
The market volatility we’re experiencing will most likely be with us for the foreseeable future. The Fed believes this rate hike can produce a soft landing for the markets and economy. However, there is a growing number of economists who feel a recession is imminent. A recession is two quarters of negative GDP back-to-back and we’re halfway there as the first quarter of 2022 ended with GDP in negative territory.
It won’t hinder our clients’ progress
The advisors at Bane O’Leary know how to navigate a market like this. By utilizing our bear market strategy model and investing in some specific market sectors, we’ve achieved positive returns year-to-date where the S&P 500 is down over -13% YTD and the Nasdaq is down over -21.17% at the time this article is being written.
Give us a call or schedule a meeting if you want to discuss how you can leverage the Fed’s rate hike for your financial plan.