It’s a new year and the fear of rate hikes has plotted a rocky course for the markets. Here are a few points to keep in mind as we navigate this uncertain course.
It’s a big picture
If one stock declines significantly, it doesn’t mean the entire market is down. Stocks may be subject to idiosyncratic risks that apply only to them. There may be sector or industry related news that is putting pressure on similar companies.
We encourage investors to resist the urge to take a myopic view and instead long at the picture of the market as a whole over the long term, instead of certain parts of it on a short term basis.
Hints at a March raise
The Federal Reserve Open Market Committee met on January 26-27th. To quote the Fed, “the Committee expects it will soon be appropriate to raise the target range for the federal funds rate”. As there is no meeting in February, it seems likely the first rate hike of the year could happen in March. They also announced that they will continue to taper asset purchases with the mention of intending to maintain accommodative monetary policy on some level.
Rate hikes are a short term shock
Changes in rates do not impact the stock market in the long term. Much like a supply shock (oil shortage, for example), there is no systematic impact on supply and demand forces that prevail over longer time periods, and that is the primary driver of the health of the economy as a whole.
However, having said that, given 4-5 rate increases are on the docket for this year, we would caution you to be ready for some volatility in the days and months ahead.
As always, it is of vital importance to make sure your portfolio is designed to match your risk tolerance, and any life changes should be accounted for in your financial plan. If you’d like to discuss any of this with us, please set up a time to speak.
Board of Governors of the Federal Reserve System. (January 26, 2022) Federal Reserve issues FOMC statement. Press release. Retrieved from https://www.federalreserve.gov/newsevents/pressreleases/monetary20220126a.htm