Don’t Fight the Fed
In July and into August, there was a surge in optimism that the rate of inflation had peaked and talk that interest rates might head lower in 2023. This sparked a rally with the S&P 500 index gaining 9.2% in the month of July 2022.
However, September lived up to its reputation of being the worst performing month, on average, for stocks going back nearly a century – often referred to as the “September Effect.” On September 27th the S&P 500 index closed at its lowest level in nearly two years and is down nearly 23% year to date.
Over the past few months, Fed Chairman Jerome Powell has been direct with regard to the Fed’s goal and has stated in recent interviews, “restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance.” He further stated, “while higher interest rates, slower [economic] growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.” It seems that Fed prefers to take a tough stance now rather than be forced into even harsher measures down the road.
At the last Federal Reserve meeting on September 21st, the Fed announced a rate hike of 0.75%, bumping the federal funds rate to a target range of 3.00 – 3.25%.
|Fed Meeting Date||Rate Change (bps)||Federal Funds Rate|
|9/21/2022||+0.75%||3.00% to 3.25%|
|7/27/2022||+0.75%||2.25% to 2.5%|
|6/16/2022||+0.75%||1.50% to 1.75%|
|5/5/2022||+0.50%||0.75% to 1.00%|
|3/17/2022||+0.25%||0.25% to 0.50%|
How might an investor react amid today’s uncertainty?
- Look past the headlines. Stocks respond to short-term headlines, but you should stay focused on your long-term goals.
- Don’t try to time the markets. To be a successful market timer, you must consistently pick the top and the bottom through numerous cycles. We have yet to find anyone that has mastered such a feat.
- Maintain your diversified portfolio that is based on your risk tolerance. What level of short-term loss is acceptable as you invest toward your long-term financial goals? Are you finding the recent market decline is forcing you to rethink your tolerance for risk? If so, let’s talk.
- Focus on your holistic financial plan. This keeps you focused on your long-term goals and helps remove the emotional component that encourages too much risk when stocks are surging and discourages one from panic-selling when markets decline.