By Mickey Welcher
Wednesday’s Federal Reserve Board meeting is an important one, most especially for what the board will say about future rate hikes over the rest of the year.
If they take a “hawkish” or aggressive approach to raising rates, the market could become much more volatile and the pullbacks more frequent. If the Fed is a bit more “dovish” and takes a “wait and see” approach to future rate hikes, we could have one quick pullback, followed by a rally back to new highs.
Make no mistake, though. As interest rates rise, the stock market will fall.
You can thank the March 10 Labor Department report that showed strong employment and wage growth for this. More jobs mean great news for the majority of us, but for stocks this will likely trigger a selloff. The strong report gives the Fed enough justification to raise interest rates the first time this year.
What’s more, this will likely be the first of three increases this year given the way the economy is going. And stocks will likely keeping taking hits.
Here’s why. The market rally over the past nine years occurred due to investors buying high-dividend stocks in place of low-interest bonds. There’s been no other place for investors to put their money and generate adequate returns. Raising interest rates will make bonds and even old-fashioned CDs more attractive with a higher return at far less risk.
This exodus won’t happen all at once, but we could start seeing a slow trickle out of the stock market soon. As investors become assured that they can get a similar rate of return without the market volatility, we’ll start to see a significant shift out of stocks into bonds.
There is one positive that can come from a rate increase, and that is a very needed pullback in the market. We’ve seen a huge rally since President Trump was elected, thereby pricing stocks very high. There is not much for an investor to buy at a good value right now.
If the Fed raises rates this week as is widely anticipated and discusses future increases happening sooner rather than later, we could see a pullback occurring very soon. The subsequent selling of stocks will be fast, furious and, for some, painful, but not a bad thing overall. Folks with money sitting on the sidelines are waiting to buy stocks in good companies but at lower prices.
The market has also shown incredible resiliency over its history, and we expect to see the same thing happening again in the coming weeks and months.
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