Why the Fed’s interest rate hike probably won’t keep stocks from rising | Smart Change: Personal Finances
The stock market sold off this week as investors worried about the expected hike in Federal Reserve interest rates. But their concern may be overblown, and a rise in interest rates is unlikely to derail the rise in equities, experts say.
Stocks had a volatile week, falling for the third day in a row on Thursday. After the Federal Open Market Committee’s first policy meeting of the year on Wednesday, the Fed released a statement that a rate hike would soon be appropriate. At a press conference, Fed Chairman Jerome Powell indicated that policymakers could start raising rates in March.
But Fed actions are unlikely to hinder economic growth or end momentum in equities, according to a recent research note from Mark Haefele, chief investment officer at UBS Global Wealth Management.
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This is because the Fed has pointed out that the US economy is strong enough to support higher rates, and despite their concern this week, investors are still confident in the Fed’s ability to keep inflation anchored, which which limits the need for more aggressive hikes further, Haefele wrote. .
Jim Paulsen, chief investment strategist at The Leuthold Group, agrees.
“We’re overreacting to the Fed right now,” Paulsen says. Historically, the economic recovery and bull market tend to last beyond the initial Fed hike, he adds. “I don’t see anything right now that would make you really worried that the economy is heading into a recession, and if it’s not, then it’s probably just a stock market correction.”
The corrections, while scary, aren’t all bad, he adds. These market declines can be buying opportunities. Additionally, the market often rebounds quickly after a market correction. For every time the S&P 500 has fallen at least 10% since 1980, the index was higher a year later 90% of the time, and up 25% on average, according to Data of LPL Financial.
Still, UBS advises investors to prepare their investment portfolios for rate hikes. Rising yields should favor value stocks, which are considered undervalued, over growth stocks, which are expected to grow at a faster rate than the broader market.
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