For the fifth time this year, the Federal Reserve has increased the interest rate. This time, it was a 0.75 percentage point hike. The stock market is still reeling from this latest change. Many are wondering what investment steps to take for the near future.
These concerns are justified because investments such as stocks and cryptocurrency have been hugely impacted by higher interest rates in 2022. With the rates on a never-ending rising streak, what can stock investors expect for the rest of the year given how interest rate impact stock markets? Will this trend continue until December?
Stocks Slump in Volatile Aftermath
Central banks across the world led by the Fed are hiking interest rates for more expensive borrowing and slower economic growth. The aim is to control inflation to only the blink of inflation. Wall Street and other quarters are worried that the central banks may be chewing more than they can swallow. The banks may be driving the global economy into a recession.
Many hours after the Fed announced a hike in interest rates, various stocks continue to fall. The Dow Jones Industrial Average was at 29,590.41, a 486.27 points slump. There were also tumbles for Nasdaq Composite and S&P 500 by 1.8% and 1.72% respectively. Shares in sizeable firms including tech giants Apple and Microsoft are still falling. These growth stocks are expected to slow down the most in a recession. Their reaction is in contrast to bond yields that have gained this week. The energy sector is also down by about 9%.
Response Immediate but Not Well-Defined
Whenever the Fed raises or lowers the base points, there are significant back-and-forth movements based on hints from the rates. Market players will attentively follow the goings-on amid intense volatility.
The economy is at serious risk of a major downturn in the near term owing to the speed at which the Fed is tightening things in 2022. Every investor knows the nature of monetary policy to operate with a delay. Significant impacts on the economy from today’s hikes may not be experienced until after one year or even more.
Given that the rate hike has not been this rapid for decades, the impact on the economy is bound to be major in the longer term. Don’t forget that the Fed is also implementing another tightening tactic – leaving the holdings of bonds on the balance sheet to decrease. To add to this measure, many other central banks across the globe are hiking rates too.
A look at the rest of the year
The Federal Open Market Committee of the Federal Reserve System meets eight times per year and among other things, chooses what to do with the Fed rate. Now two meetings are remaining this year – Nov. 1-2 and Dec. 13-14.
If the inflation continues on the current path, it is almost certain that the committee will still hike the rate in those meetings. There were predictions that the Fed could hike rates several times in 2022. Indeed, the Fed promised more actions on the target rate if it will be appropriate. The committee expects a 4.25% midpoint by the end of the year.
The political uncertainty in the United States is not helping matters, with mid-term elections fast approaching. Experts believe that the Republicans will neutralize the Democrats’ control of the executive and legislature.
In short, rising interest rates typically cause apprehension in the stock market. The Fed correcting the market frequently is normal. They may increase the rate several times before the year ends.
You can expect the market to remain volatile given the confusion about the way inflation will behave, the interest rate increases by the Fed, and the ongoing Ukraine-Russia war among other factors. Favourable factors may emerge ultimately, but the prevailing economic slowdown poses numerous challenges.
For the stock investor, having an investment strategy is particularly meant for times like this. Use your plan to chart your next investment decision. You may want to consult your wealth investment expert to make sure your investments are properly aligned for the long-term effects of shocks in the stock market.