Mitch's Mailbox

March 31st, 2022

How Will Bigger Rate Hikes Impact the Market?

Share
Subscribe

Janet A. from Colorado Springs, CO asks: Hello Mitch, I noted in the news last week that the Federal Reserve was open to bigger interest rate increases, and it appeared that the statement spooked the markets. What are your thoughts on this?

Mitch’s Response:

Thank you for sending in your question. You’re referring to remarks made last week by Federal Reserve Chairman Jerome Powell at a discussion before the National Association of Business Economics, where he said that “if [the Fed] thinks it’s appropriate to raise [by a half point] at a meeting or meetings, we will do so,” adding that, “if [the Fed] determines that we need to tighten beyond common measures of neutral and into a more restrictive stance, we will do that as well.”1

These comments came just a few days following the Federal Reserve’s decision to raise the benchmark fed funds rate from near zero to a range between 0.25% and 0.50% – a modest quarter-point hike.

Fears Surrounding Another Market Correction? See What Steps You Can Take From Here.

We just witnessed yet another market correction. Some investors are questioning if it’s over and others are debating on exiting the market out of fear. As difficult as it may seem, it’s better to remain calm and avoid rash moves.

It’s easier said than done, but the actions you take right now have the greatest potential to define your financial future. And I’m here to help!

I have put together a free Black Swan investing playbook with insights and guidance to help you seek success when investing through these unprecedented times. If you have $500,000 or more to invest, get our free investing playbook today.

Download – The Black Swan Investing Playbook2

What threw the market a bit was Mr. Powell’s seeming shift into a more hawkish tone, just days after the formal Fed decision. It was as though the market got a clearer glimpse into the Fed Chairman’s actual thinking, which revealed more hawkishness than previously thought.

I generally agree that a bigger- and more aggressive-than-expected path of rate increases would be a negative for stocks, as the market does not like surprises. But I’m encouraged by two features of this story, at least in the near term.

The first is that Chairman Powell is telegraphing his thoughts on interest rate policy and inflation, which reduces the likelihood of a negative surprise. The second feature is that we are just one rate hike into what is likely to be a multi-year monetary tightening campaign. As I’ve written in the space before, bull markets and economic expansions end after the Fed’s last rate hike, not their first one. Stocks have performed quite well historically in the early phases of rate hike cycles, and I expect a similar outcome for 2022 given the strong economic growth backdrop.

All that to say, I would not worry too much about Fed policy this year. The equity market is well aware of the Fed’s plans this year and much of the expected tightening for 2022 is already getting baked into stock prices, in my view. If you want a better interest rate metric/fundamental to watch this year that can give you some insight into the growth outlook, keep your eye on the yield curve as measured by the 10-year US Treasury bond yield minus the 3-month US Treasury bond yield. As you can see in the chart below, the yield curve has been steepening so far in 2022, a good sign that growth conditions are present even as the Fed engages in a tightening campaign.

Source: Federal Reserve Bank of St. Louis3

More rate hikes are coming in 2022, but the good news is that market participants are all aware of it. I do not think you need to fear the Fed this year.

With that being said, in times like these, it is better to base your decisions on research, not emotions! Don’t sell and exit the market or wait on the sidelines out of fear.

That’s why I have put together a free Black Swan investing playbook4 with insights and guidance to help you seek success when investing through these unprecedented times. If you have $500,000 or more to invest, get our free investing playbook today. You’ll learn about seven time-tested guidelines to help you seek investment success through this historic “Black Swan” market downturn.

Disclosure

1 Wall Street Journal. March 21, 2022. https://www.wsj.com/articles/powell-says-fed-will-consider-more-aggressive-interest-rate-increases-to-reduce-inflation-11647880218

2 Zacks Investment Management reserves the right to amend the terms or rescind the free Black Swan Investing Playbook offer at any time and for any reason at its discretion.

3 Fred Economic Data. March 28, 2022. https://fred.stlouisfed.org/series/T10Y3M#0

4 Zacks Investment Management reserves the right to amend the terms or rescind the free Black Swan Investing Playbook offer at any time and for any reason at its discretion.

DISCLOSURE

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.

Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable. Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein.

The S&P 500 Index is a well-known, unmanaged index of the prices of 500 large-company common stocks, mainly blue-chip stocks, selected by Standard & Poor’s. The S&P 500 Index assumes reinvestment of dividends but does not reflect advisory fees. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. An investor cannot invest directly in an index.
READ PREVIOUS
How Will Fed Rate Hikes Impact the Market and Economy?
READ NEXT
Transportation Stocks Move Up, Corporate America Invests, Natural Gas Prices Rise

Explore Zack’s Archives

View
Mitch's Mailbox
June 30th, 2022
What Does the Secure Act 2.0 Mean for Retirees?
Read more
Mitch on the Markets
June 27th, 2022
Why The Fed Can’t Fix Inflation
Read more
Private Client Group
June 27th, 2022
Americans Buying Less Gas, Gas Tax Holiday Floated, Home Prices Hit New High
Read more
Mitch's Mailbox
June 23rd, 2022
Bear Market + High Inflation. What Should Investors Do?
Read more
Private Client Group
June 21st, 2022
Fed Raises Rates, Stocks in Bear Market, Retail Sales Fall But…
Read more
Mitch on the Markets
June 21st, 2022
It’s Officially a Bear Market—Here’s What to do Next
Read more

Daily financial tips directly
from the Zacks family.

Top

Search

Contact

I'm a Private Client I'm a Financial Professional