After increasing rates six times already this year, the Federal Reserve is expected to increase rates again at its meeting on December 13–14. The CME FedWatch tool predicts that the nation’s central bank will increase the benchmark Fed funds rate by 0.50 percentage point, though a small minority predicts a rise of 0.75 percentage point.
Additionally, it’s unlikely to be the final increase for this economic cycle. The likelihood that the Fed will increase interest rates at its meeting in February 2023 is high as it works to control inflation, which reached 7.7 percent in October when compared to a year earlier.
Over the past year, higher rates have been reflected in stocks, cryptocurrencies, commodities (like oil), and many other investments. But what can investors anticipate going forward, and how long will the effects of the rising rates last?
The markets are still under pressure from higher rates and recession worries.
Although the Fed has already increased interest rates six times this year, it was clear to the markets that the central bank wasn’t kidding when it said it was about to tighten monetary policy. Cryptocurrencies and many of the riskiest stocks reached their peak in November 2021.
Caleb Tucker, director of portfolio strategy at Merit Financial Advisors in the Atlanta region, claims that because the stock market is prospective, even the anticipation of higher interest rates has had an effect.
For the broad-based Standard & Poor’s 500 Index in 2022, things have mainly gone downhill, and more so for riskier investments. Similar circumstances have affected the Dow Jones Industrial Average and the Nasdaq Composite, as higher rates and the likelihood of even higher rates prevented any significant gains in the indices.
Due to expectations that the Federal Reserve would raise interest rates repeatedly to control inflation, stocks have declined and interest rates have risen since the beginning of 2022, according to Greg McBride, CFA, Bankrate’s chief financial analyst.
The S&P 500 is down about 17% since the beginning of the year, the tech-heavy Nasdaq Composite is down about 30%, and the Dow Jones Industrials is still down about 7%, despite a slight fourth-quarter bear-market rally. Even riskier investments have performed significantly worse.
The hardest hit assets as markets adjust to the reality of higher interest rates are those that have benefited the most from ultra-low interest rates, such as high-octane growth stocks with earnings well into the future and non-cash-flow-generating assets like cryptocurrencies, according to McBride.
For instance, from their peak prices in 2021, high-growth stocks like Cloudflare and Carvana have declined by 80% and 98%, respectively.
The most popular cryptocurrency, Bitcoin, has decreased by about 75% since reaching its peak in November 2021. Ethereum, the second-largest cryptocurrency, has experienced a similar decline, down 74%, despite going through “the merge” recently.
Will inflation and rising rates continue to wreck stocks?
Since the beginning of 2022, commodities, cryptocurrencies, and stocks have all experienced significant volatility as investors have accounted for rising interest rates. With numerous rate hikes already completed and more appearing to be on the horizon, what can we expect for the following six months?
Even though there is less money moving around in the financial markets, investors have a well-known propensity to look beyond the day’s headlines.
Dan Raju, CEO of the brokerage platform Tradier, asserts that periods of stock market volatility will always be brought on by rising interest rates.
Market observers disagree on whether the Fed will act too strongly or too softly and whether this has already been factored into stock prices. The markets’ volatility is a direct result of this uncertainty. In the interim, markets continue to adjust to these hefty rate increases in the hopes that the Fed will be able to better control inflation and bring it under control. Further rate increases will therefore probably make the market even more difficult for investors.
The market appears to be factoring in the likelihood of a recession following the rate increases of 2022. The benchmark 10-year Treasury is currently yielding 3.5 percent, which is below the 52-week high of 4.33 percent reached in October. In comparison to their expectations from two months ago, the decline suggests investors are becoming more pessimistic and anticipate a slowdown in the economy in the near future.
Many market watchers anticipate a recession in 2023 as a result of short-term rates currently being significantly higher than longer-term rates, a phenomenon known as a yield-curve inversion. The stock market would likely fall even further during a recession until investors could start to estimate the size and scope of any impending economic downturn.
How the crypto and commodities markets have been impacted by higher interest rates
In the face of higher rates, two other significant asset classes have reacted differently. While the price of cryptocurrencies has fallen along with other risky assets, many commodities, such as oil, wheat, and lumber, experienced price spikes in the beginning of 2022. However, many of these movements were short-lived.
Cryptocurrency has frequently been promoted as the panacea for all of life’s ills, including deflation, inflation, low interest rates, a lack of purchasing power, and so forth. As long as cryptocurrency was increasing, seemingly irrespective of other assets, it was simple to believe in those positives.
Crypto assets had previously been thought of as an inflation hedge, but lately, says Tucker, they have behaved more like other risk assets like stocks. “In the future, higher rates will be a barrier for crypto assets.”
In fact, as with other risky assets, cryptocurrencies fell when the Fed announced its intention to raise rates in November 2021, and they continued to fall throughout 2022 as the Fed aggressively carried out its plan. In addition, well-publicized crashes of specific cryptocurrencies and exchanges like FTX have severely dented traders’ faith in these digital assets.
While some commodities saw their prices soar at the beginning of 2022, in many cases those commodities have now reversed some, if not all, of those upward moves. Many commodities have fallen significantly from their recent highs as a result of fewer supply restrictions and higher interest rates.
For instance, the price of oil, which peaked at about $123 per barrel in June, has been steadily declining to about $74 per barrel. Investors’ expectations of a slowdown not just in the U.S. but also internationally are signalled by the decline in such a significant commodity.
Similar to other commodities, the price of wheat increased during the early stages of the Russian invasion of Ukraine, but prices are now significantly lower than they were in the months preceding that crisis. Lumber has dropped to $415 from its March peak price of more than $1,400. And since reaching a 52-week high in March, steel prices have dropped by roughly 30%.
The markets appear to have been convinced that an economic slowdown is imminent by higher rates and an aggressive Fed. Commodity markets will likely decline even more as a result of additional rate hikes.
How should rising interest rates affect your investment approach?
Rising interest rates, high inflation, and international conflict all contribute to a volatile environment for investors. And, with commodities and stocks indicating a slowdown, investors may want to proceed with caution.
Most investors, however, should stick to a long-term strategy when approaching this type of market. For many, the long-term strategy entails continuing to invest regularly in a diversified portfolio of stocks or bonds while ignoring global noise. Others’ game plans may include purchasing and holding well-diversified index funds. In any case, don’t let emotions get in the way of a sound long-term investment strategy.
It’s important to maintain perspective, even though short-term traders might be anxious about rising rates and trying to predict a recession. Buy-and-hold investors can take advantage of the market’s volatility and then look for the best time to add more money, as opposed to trying to find the best time to sell.
According to McBride, pullbacks present appealing buying opportunities for long-term investors.
The opportunity to expand your portfolio at a discount during a downturn can be appealing. You pay a very high price in the stock market for a positive consensus, as legendary investor Warren Buffett once said. In other words, stocks are less expensive when fewer people think they’re a good investment.
To sum up
In 2022, interest rates quickly increased; the current focus is on how high they will go. Long-term investors may view it as the perfect opportunity to purchase some high-quality investments at discount rates.
Additionally, Buffett has some advice for when stock prices are still falling: Opportunities come rarely. When it rains gold, put out the bucket, not the thimble.
