Invest, don’t give into FUD. The Fed’s latest rate hike is causing fear in the stock market, but as investors we should try to separate noise from signal as I explain in today’s video.
The changing seasons from summer to fall bring familiar patterns like leaves falling from trees and people getting their pumpkin spice lattes on. But one pattern we haven’t seen in 4 years is the stock market tumbling in reaction to aggressive Fed rate hikes.
In order to combat the highest inflation we’ve seen in 40 years, The Fed is having to hike interest rates (Fed Funds Rate) more aggressively than the markets want it to. Stocks have been falling as a result of The Fed hiking rates by 75 basis points on September 21, 2022 during the latest Fed meeting (FOMC).
As interest rates generally go up, stock prices generally go down because other assets like bonds start offering more competitive yields. Higher interest rates also tend to lead to higher discount rates for future cash flows, thereby making companies’ valuations lower. Hence a stock market selloff.
As the stock market goes down, there have been some articles fearmongering about people losing their wealth. But I consider this to be noise.
I see the Fed’s rate hike as a signal that some of our favorite companies’ stocks could be going on sale and this could be an opportunity to buy stocks instead of selling your stocks in a panic when giving in to the fear, uncertainty, and doubt (FUD) as some articles warn.
While Consumer Price Index (CPI) Inflation had reached a recent peak of 9.1% in June 2022, it hasn’t come down all that much yet. This mainstream inflation gauge was still at 8.5% in July 2022 and then came down to 8.3% in August 2022.
Thus, Fed Chair Jerome Powell said that The Fed is going to keep sticking with their monetary tightening policies of raising the Fed Funds Rate and paying off some of The Fed’s almost $9 Trillion in assets.
During the summer, the collective stock market seemed to believe that The Fed was bluffing and that they were only going to hike by 50 bp at most. At Jackson Hole, Mr. Market got upset by Jerome Powell’s comments dialing that dovishness back and saying The Fed must fight inflation with whatever it basically takes.
In America, usually one person’s spending is another person’s income, and now that the days of cheap debt are over (for now), people and companies are less willing to spend on consumption and growth initiatives. The economy is slowing down like The Fed intended.
The article I discuss said that this rate hike is bringing us into “treacherous waters” with wealth destruction and earnings declines. I don’t agree with the wealth destruction part because I tell friends and family that you have only lost money if you have locked in the sale of a stock you sold at a loss. You haven’t lost money yet if your portfolio is only showing a percentage decline at the moment but you are still holding onto the stocks or funds. These assets could recover in the future. You just have to decide if you will keep believing in what you own.
And while it may be true that mortgage rates above 6% are discouraging people from buying homes — maybe people have to keep renting at the median $1300/month instead of paying the median mortgage amount of $1900/month nowadays. In the mean time, people can invest that $600 difference in stocks or a Series I bond at 9.62%, for example. Then when rates go down again someday you might have enough saved/invested to more easily afford a house (maybe even at lower prices too!).
Instead of allowing fear to influence our investing decisions, we can see this as a signal of an opportunity to buy stocks. If we have done the work to understand the stocks we’re investing in and we have conviction, we could have a wealth-building opportunity of a lifetime in front of us in the coming months/year as rates keep going up.
If you’re interested in learning how to take control of your finances and start becoming an investor like Warren Buffett, check out my free PDF guide.
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