Why the Fed's Interest Rate Hike Probably Won't Stop Stocks From Rising
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The stock market sold off this week as investors worried about the Federal Reserve's expected interest rate hike. But their concern could be overblown, and an increase in interest rates isn't likely to derail stocks' upward climb, experts say.
Stocks had a volatile week, falling for the third day straight 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. In a news conference, Fed Chair Jerome Powell indicated policymakers could begin to raise rates in March.
But the Fed's actions are unlikely to hamper economic growth or end stocks' momentum, according to a recent research note from Mark Haefele, chief investment officer at UBS Global Wealth Management.
That's because the Fed stressed that the U.S. economy was strong enough to handle higher rates, and despite their fretting this week investors are still confident overall in the Fed's ability to keep inflation anchored, which limits the need for more aggressive hikes further out, 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 the bull market tend to last beyond the Fed's initial increase, he adds. “I don’t see anything right now that would really make you worry that the economy is heading for a recession, and if it's not, then this is probably just a correction in the stock market."
Corrections, while scary, aren't all bad, he adds. Those market dips can be buying opportunities. Plus, the market often rebounds quickly after a market correction. For every time the S&P 500 has dropped at least 10% since 1980, the index was higher one year later 90% of the time, and up 25% on average, according to data from LPL Financial.
Still, UBS advises investors prepare their investment portfolios for rate raises. Rising yields should favor value stocks, which are stocks that are considered undervalued, over growth stocks, which are expected to grow at a higher rate than the overall market.
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