This week the US central bank raised interest rates by 75 basis points to counter runaway inflation. Following the stocks rally, many investors are excited at what they think could be an easier monetary policy.
Such a response to the Fed move is surprising. It appears a section of the stock market is only seeing what it likes to see. Investors are probably encouraged that rate cuts could be on the way, and this could mean a higher value for stocks.
But the situation is not as simple as it seems because of the uniqueness of how interest rate impact stock markets. There is a reason for the stock investor to plan for the road ahead. What exactly can one keep in mind or do for the remaining part of 2022 and beyond?
What the Rate Hike Means
This year alone, the rate hike has totaled about 3 percentage points, which means that a debtor of $10,000 has to pay $300 as added interest. A 0.25 percentage-point interest hike attracts an additional $25 annual interest on a $10,000 debt. With this new rate hike of 0.75 percentage points, there will be an additional $75 in interest.
This increase is the biggest in almost three decades. As signs show, the hike will negatively impact most companies because the cost of borrowing has gone up.
For the stock investor
Before the Federal Reserve announced the rate increase, the stocks in the US had already started to rise. There was a see-saw between small losses and gains for most of the day before a buying rush in the closing hour. While real estate and healthcare stocks fell, there were gains in the rest of the market.
Any drastic action from the Fed is bound to elicit panic among stock investors because it causes volatility in the market. With profit warnings increasing by the day, stock investors are taking off. The latest major turn of events was the advance announcement by FedEx, a leading transport and logistics firm. FedEx’s situation seems to have caused ripples in the market already, as there were dents in the shares of other companies such as Deutsche Post (DPH:XETRA) and UPS (UPS:NYSE).
Tips for Survival as a Stock Investor
When the news of a new rate hike strikes, one can be tempted to alter their investment portfolio. However, if there is a robust investment plan, it is better to let it stand.
Experts don’t believe there is a need to make any drastic changes to the stock investment, especially if it is within a diversified portfolio. Simply put, it is important to remain cool despite the changes. Usually, panic can cause an investor to sell out only to regret it later.
That is not to say one shouldn’t expect market volatility. As market participants continue to digest the recent interest hike, you can bet there will a high level of volatility. Everyone will be trying to understand the wins and losses in the market.
A new rate means that the stock investor can grasp new opportunities. It is a bear market, so some stocks can be available for less. Some stocks will do well now that the Fed has hiked the rate, but others suffer.
Bank stocks are likely to do well than utility stocks, but again, this is not cast in stone. In other words, it is better to think long-term while considering which areas you need to accelerate or slow down. A sector could look undesirable now, but a stock investor can decide to consider the longer term.
How is your stock investment mix? This disruptive event offers the perfect opportunity to review long-term investment goals. Look at your risk-averseness, time to retirement, and financial obligations to determine if your investment portfolio is sound. Stocks should also be diversified because as noted, stocks behave differently. Venture into all types of markets and see how that turns out in the longer term.
There is a common understanding that an investor should not focus on fighting the Fed or the central bank but should instead focus on controlling their financial situation. In summary, staying calm is the trick that investors will want to apply this season and others that may come in the future.
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