As the Fed Raises Interest Rates, Financial Markets Will Remain Volatile Throughout the Summer
Financial markets have taken a significant hit in the last week as a result of high inflation figures and an expected interest rate hike by the US Federal Reserve, raising fears of a recession.
On Monday, June 13, U.S. stocks entered bear market territory, with the S&P 500, Wall Street’s benchmark index, falling 3.9 percent to its lowest level since March 2021.
The drop was a more than 20% drop from a record high in January, capping two years of largely consistent growth.
According to World Bank President David Malpass, “for many countries, recession will be hard to avoid.”
The Bureau of Labor Statistics announced on Friday that the consumer price index, a key indicator of inflation, had risen 8.6 percent in the previous year, exceeding financial experts’ expectations.
According to the bureau, the 12-month increase was the largest since December 1981 and was driven by higher food, fuel, and housing prices.
For the first time in years, the Fed began raising interest rates in March, approving a quarter-point increase in March and a half-point increase in May, while signaling that similar moves would likely be made in the summer.
The central bank did just that on Wednesday, raising interest rates by three-quarters of a percentage point (the largest increase since 1994) and warning of further increases before the end of the year.
According to CNBC, Jerome Powell, the chairman of the Federal Reserve, said, “Clearly, today’s 75 basis point increase is an unusually large one, and I do not expect moves of this size to be common.”
“Though inflation is affecting many countries, some lawmakers have criticized the Biden administration for addressing inflation concerns too slowly.”
The White House is “closely watching” the situation, according to White House press secretary Karine Jean-Pierre, the day after the markets plummeted dramatically. “But we know that this is, what we’re seeing right now is, what we’re facing are global challenges: Putin’s price hike, inflation, coming out of a once-in-a-generation global pandemic.” Since Russia invaded Ukraine earlier this year, inflation has risen, further disrupting supply chains that have been snarled since the start of the COVID-19 pandemic.
According to financial firm Charles Schwab, bear markets have lasted an average of 15 months since 1966. “That’s why long-term investors are usually better off staying the course and not pulling money out of the market.” Nonetheless, experts predict that the next few months will be difficult for US financial markets. This market volatility will last for some time.
Schwab recommends “regular rebalancing and appropriate diversification” for investors nearing or in retirement. The firm also advises those nearing or in retirement to avoid selling their stocks until the market improves.
Sekera, a CFA, also predicted that the stock market will remain especially volatile over the summer. He expects investors to wait for signs that inflation will begin to moderate and that the US economy will stabilize without entering a recession in order to stabilize.
Regardless of the impending turmoil, According to Sekera and other financial experts, the current market may present an opportunity for astute investors who take advantage of low share prices for strong companies.
Because of this indiscriminate selling, a wide range of high-quality companies are now trading at significant margins of safety below our intrinsic valuations.
Investors should “judiciously add to equity exposure” now, according to Sekera, and act in accordance with their long-term plan, “which should encapsulate both their investment goals and risk tolerance.”
Sekera suggested investing in certain communications and technology companies, which he sees as having “significant undervaluation.”
Meanwhile, investors should steer clear of the energy sector, which has “run up too far this year and is now overvalued.”
Ryan Payne, president of Payne Capital Management, gave Yahoo! similar advice.
“I think you buy with impunity here,” Payne stated. “As a long-term investor, you buy when there’s blood on the streets. If you look at a value stock portfolio, it’s down less than 10% this year,” Payne said.
“Right now, the only bear market you’re seeing is in growth, disruptive technology, and bitcoin. I think you have a gift from the gods here as a long-term investor to buy.”