According to CME FedWatch, the Fed plans to raise interest rates at its January 31-February 1 meeting after seven rate hikes in 2022. tool.
It also may not be the last increase in this economic cycle. The Fed is likely to hike rates at his March 2023 meeting, and in December 2022 he is looking to keep inflation in check, which has reached 6.5% compared to a year earlier.
Commodities such as stocks, cryptocurrencies and oil saw interest rates rise last year. But what can investors expect from here, and how long will the impact of the rising interest rate environment on the market last?
Rising interest rates and recession fears lose market impact
The Fed has already hiked rates seven times during this tightening cycle, but it’s easy to identify when markets really picked up and realized they weren’t teasing that the central bank was about to recalibrate monetary policy. . Cryptocurrencies and many of the riskiest stocks peaked in November 2021.
Steve Azoury, president of Azoury Financial in Troy, Michigan, said: “Borrowing costs affect all areas of investing, buying and saving. Just predicting what will happen is enough to trigger a stock market reaction.”
Still-rising rates don’t seem to scare investors these days, however, as they expect the Fed to weaken in the near future.
“I think the market is much less worried about rate hikes now than it was in Q3 and Q4 2022,” said Dan Raju, CEO of brokerage platform Traier. increase. “Inflation has been better than expected recently, and the Fed and investors feel they have some control over inflation. rice field.
While major stock indices such as the Standard & Poors 500 spent much of 2022 in funk, stocks appear to have bottomed out since October. He’s been doing well since the beginning of the year, with the S&P 500 up more than 4% of his. The Nasdaq Composite kicked off the new year up more than 8% of his.
But what about the highly anticipated recession? The recent relative strength of the market suggests that investors may be more optimistic, or at least less pessimistic, than they are in 2022.
Brian Spinelli, co-chief investment officer at Wealth Advisor Hulbert Hargrove in Long Beach, Calif., said whether a recession will occur and its potential severity are the key uncertainties right now. says there is. “Shares are positive and our best estimate is that we expect a mild recession in the current price. is high.”
Therefore, there may still be plenty of room for the market to fall further if the economy deteriorates significantly.
Octavio Sandoval, investment director at Illumen Capital, said:
2022 looks pretty rough for underperforming high-growth stocks, and while prices may have increased recently, that doesn’t mean these stocks are anywhere near their previous highs. Software stocks such as Cloudflare and Datadog, for example, are less than half valued at their all-time highs.
When it comes to cryptocurrencies, Bitcoin is down more than 65% from its all-time high in November 2021. Ethereum, the second-largest cryptocurrency, has seen a similar drop at the same time that riskier assets have struggled.
Will rising interest rates and inflation continue to derail equities?
Stocks and cryptocurrencies have endured notable volatility as investors factor in rising interest rates. But with so many rate hikes already completed and several more on the horizon, what’s in store for the next six months?
“The cost of capital for businesses is rising, lending terms to consumers will undoubtedly get tighter, and there remains uncertainty about the level at which the Fed will pause rate hikes to keep inflation in check,” Spinelli said. I’m here.
With less money moving around in the financial markets, overall investment is net negative, but investors have a notable habit of looking ahead to today’s news.
“The market seems to be pricing in a Fed moratorium in Q1 2023,” Spinelli said. “The Fed says it will continue to raise rates to keep inflation in check, but the market is hesitant.” [that stance] at this point. “
Market watchers are divided on whether the Fed is doing too much or too little, and whether it’s already reflected in stock prices. This uncertainty itself causes market volatility. Meanwhile, the market continues to readjust to aggressive Fed rate hikes, and we expect the central bank to better handle and contain inflation. , and the market became more disturbing.
The trailblazing 10-year Treasury, which currently offers a yield of 3.5%, is off the 52-week high of 4.33% set in October. The decline shows investors are more likely to expect the economy to slow in the near term compared to his expectations four months ago.
With short-term interest rates now well above long-term rates (the so-called inverted yield curve), many market watchers expect a recession in 2023. Measure the length and depth of the upcoming recession. But that may not stop the intermittent bear market rally.
“Retail investors are confident the Federal Reserve will announce a much smaller rate hike this month and expect the tech sector to rebound after its next meeting,” said Raju. . “This drama is not over yet”
Impact of Rising Interest Rates on Cryptocurrency and Commodity Markets
Two other major asset classes reacted differently in the face of higher interest rates. While cryptocurrency prices plummeted along with other risky assets, many commodities, including oil, surged in his early 2022, but many of those moves proved short-lived. Both oil and cryptocurrencies seem to have bottomed out as the rate of rise is expected to slow or stop.
Cryptocurrencies have been touted as a panacea for things that plague you: inflation, low interest rates, lack of purchasing power, and the devaluation of the dollar. , seemingly regardless of other assets, could easily be believed.
“Higher interest rates generally reduce the appetite for riskier investments, which is likely one of the reasons for the significant decline in digital asset prices last year,” Spinelli said. increase.
Indeed, cryptocurrencies, like any other risky asset, have responded to reduced liquidity by declining when the Fed announced its interest rate hike intentions in November 2021, and then by the Fed aggressively pushing it through 2022. I fell because I ran it. Moreover, the high-profile explosion of individual cryptocurrencies and exchanges such as FTX has shaken traders’ confidence in these crypto-assets.
“The future of cryptocurrencies in 2023 will depend on how much risk appetite exists in the investor community,” says Raju. “Right now, the market doesn’t seem to have that appetite.”
Many commodities are well off their recent highs and are down a few notches as supply becomes less constrained and interest rates rise. However, expectations that the Federal Reserve will complete rate hikes soon have recently helped keep oil from falling below about $70 a barrel.
For example, crude oil prices peaked around $123 in June before steadily declining to around $74 per barrel. However, oil prices recently bottomed out at around $70, he said, in early December.
How should rising interest rates affect your investment strategy?
Rising interest rates, high inflation, and uncertainty all create volatility for investors. Volatility is so high that investors may want to act cautiously.
However, the best way for most investors to approach this type of market is to stick to a long-term game plan. It means continuing to invest regularly and mostly ignoring the noise around the world. For others, the game plan may involve buying and holding well-diversified index funds. Either way, don’t let emotions get in the way of effective long-term investment planning.
Short-term traders may be sweating rate hikes and trying to time a recession, but it’s important to put things in perspective. Instead of trying to find the right time to sell, buy-and-hold investors can use market volatility to their advantage to try to find the right time to add more.
“For long-term investors, the decline represents an attractive buying opportunity,” said Greg McBride of the CFA, Bankrate’s chief financial analyst.
A recession is an attractive time to add to your portfolio at a discounted price. Legendary investor Warren Buffett once said: That means stocks are cheap when few people agree they are an attractive investment.
Conclusion
Interest rates will rise sharply in 2022 and the big question now is how much will they rise in 2023? Investors with a long-term investment horizon may see it as an ideal time to pick up quality investments at bargain prices.
And what if stock valuations continue to plummet? Buffett has some wisdom for such situations, too. When it rains gold, take out a bucket instead of a thimble. ”
