The stock market has been plunged into turmoil following the Federal Reserve’s decision to raise its benchmark interest rate. Investors have been feeling the pinch and are being forced to re-evaluate their portfolios in the face of the hike. As expected, the Dow Jones Industrial Average closed Friday at 25,216.39, down 1.2 percent from Thursday’s close.
Understanding the Fed Rate Hike
The Federal Reserve’s decision to raise its benchmark interest rate, which sets the cost at which banks loan each other money, from 2.25 percent to 2.5 percent was the central bank’s fourth rate hike of 2018.
The Fed noted that rising inflation and healthy economic growth are driving the rate hike, which is intended to slow economic growth and keep a lid on inflation. This means that financial institutions may pass on the interest rate hike to consumers as loan and credit card rates are likely to go up in the coming weeks.
Why Are Investors Nervous?
The reality is that investors are worried about how the Fed’s rate hikes will impact the stock market. Many investors fear that higher loan rates will put a burden on corporate earnings and reduce consumer spending, thereby leading to lower stock prices.
Equity investors are also concerned that rising interest rates could make bonds and other fixed-income investments more attractive than stocks. That could lead to investors selling off equity holdings and purchasing fixed-income instruments, thereby causing the stock market to come under pressure.
Impact on Sectors
Since the announcement of the rate hike, the U.S. stock market has been plunging. Naturally, some sectors were more affected than others.
The Technology Sector: This sector saw the biggest losses, with the technology-heavy Nasdaq Composite showing a drop of 2.2 percent. Technology heavyweights such as Apple, Amazon, and Microsoft all saw their stock prices drop sharply.
The Energy Sector: Falling oil prices and a weaker outlook for energy companies caused the energy sector to plunge.
The Financial Sector: Higher loan costs are bad news for banks and lending institutions, which is causing the financial sector to suffer heavy losses.
Tips for Investors
Although investors might feel despondent, there’s still no need to panic as the stock market can go through cycles of volatility. All investors should take a long-term approach when dealing with the market’s fluctuations.
Here some tips for investors dealing with the rate hike:
• Don’t Panic: Investors should remain calm and not make knee-jerk decisions. Investing is a long-term game, and trying to time the markets can prove damaging.
• Be Patient: Investors should resist the temptation to buy into the market’s volatility. Taking a wait-and-see approach may be more beneficial than trying to make a quick buck.
• Invest in Quality: It may be tempting to pick up some cheap stocks that have been beaten down, but investors should instead put their money into quality companies in sectors that are likely to weather the storm.
• Don’t Forget Bonds: Investors are advised to diversify their portfolios by investing in more bonds. Although bonds may not be as profitable as stocks, they tend to be less volatile than stocks.
• Take Advantage of Tax Losses: If investors have taken a beating in the stock market, they can use the losses to reduce taxes. Losses can be used to offset gains from other investments.
• Make a Financial Plan: Investors should sit down and create a financial plan that takes into account the current market situation and their personal goals. A plan will help ensure that investors make well-informed decisions.
The Fed rate hike has put the stock market in a precarious situation, causing investors to take note of the heightened volatility. Investors must be careful to not make impulsive decisions and instead take a long-term approach when navigating the fluctuating markets. Being patient, investing in quality stocks, and diversifying their portfolios are all steps investors should take when faced with market volatility. Ultimately, staying the course and taking advantage of tax benefits can help investors weather the storm.
