Navigating the Ripple Effect: Federal Interest Rate Hikes and the Stock Market

Why is the Fed raising interest rates?

When the Federal Reserve raises its benchmark interest rates, it effectively makes borrowing more expensive for banks. This action is typically taken to combat inflation, moderate economic activity and/or control the pace of growth.

The Federal Reserve most recently raised the benchmark in late July, to 5.3% – the highest it's been since 2001. It was the eleventh interest rate hike in 17 months, as the Fed continues to try to curb inflation. There may or may not be another rate hike coming when the Federal Reserve meets again on September 19th and 20th. 

How do interest rate hikes affect the stock market, retirement accounts, and the economy? 

There's a complex relationship between interest rate hikes and the stock market, which lies in the interplay between interest rates and the broader economy. We see this play out in a variety of ways.

When it comes to the stock market, interest rate hikes will usually affect three things:

1. Investor Sentiment: Interest rate hikes can create uncertainty in the market. Investors start to reevaluate their investment strategies and might become more risk averse. As a result, we often see a temporary dip in stock prices and increased volatility.
2. Borrowing Costs: As interest rates rise, the cost of borrowing for businesses and consumers also increases. Companies may find it more expensive to finance projects or expand operations, leading to potential declines in corporate profits. Consequently, stock prices of affected companies may decline, impacting various sectors.
3. Bonds vs. Stocks: Rising interest rates might lead to higher yields on bonds, making them more attractive to investors seeking fixed income. This can divert investment away from stocks to bonds, thus affecting stock market demand and thus performance.

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Rate hikes often also influence a variety of sectors and investment instruments, including:

Real Estate: Higher interest rates could lead to reduced demand for mortgages, resulting in slower real estate sales. This, in turn, might impact the construction and housing sectors.

Consumer Spending: With higher borrowing costs, consumers might tighten their purse strings. Retail and consumer discretionary sectors could experience a dip as a result.

Currency Markets: Interest rate hikes can cause a currency to appreciate relative to others, potentially impacting multinational companies' earnings.

What should investors do to combat rising interest rates?

First and most importantly, keep your cool and don't make any hasty decisions. Stay informed by keeping an eye on the Federal Reserve's statements and economic indicators to anticipate rate changes.

Second, make sure your investment portfolio is diversified. Allocating your investments across various asset classes can help mitigate risks associated with interest rate fluctuations.

Third, keep a long-term perspective. Short-term market fluctuations can be nerve-wracking, but remember that historically, the stock market has shown resilience and growth over time. 

So, although interest rate hikes and their effects on the economy are a hot topic in the news, take a step back and remember that by staying informed and adopting prudent investment strategies, you can navigate the waters of the stock market and remain on the path to financial success.

If you have any questions about inflation or interest rates and how they’re affecting your progress toward reaching your financial goals, our team at Weiss, Hale & Zahansky Strategic Wealth Advisors can help. We use our strategic Plan Well, Invest Well, Live Well™ process to help our clients create a financial plan that's tailored just for them. Contact us at (860) 928-2341 or schedule a complimentary consultation on our website. 

Presented by Principal/Managing Partner Laurence Hale AAMS, CRPS®. Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. These materials are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances with your representative. Weiss, Hale & Zahansky Strategic Wealth Advisors does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice. 697 Pomfret Street, Pomfret Center, CT 06259 and 392-A Merrow Road, Tolland, CT 06084. 860-928-2341. www.whzwealth.com.