Markets shake off gains as the Fed revises rate outlook

Markets gapped lower this Monday morning as the Federal Reserve suggested an early end to bond purchases while also raising their rate outlook. The Fed’s move was based on if the US met inflation of 2% along with having positive jobs data - both conditions were met over the weekend. “Our expectation is that they are going to show three additional rate hikes in 2024” according to a rate strategist at Bank of America^1. While this doesn’t necessarily suggest an end to higher markets this year, a realization that with rising rates comes a bout of inevitable volatility.

The SP500 was lower this morning by about 1.5% after 18% gains year-to-date. The tech-heavy Nasdaq was 2%, 18.8% respectively, and international stocks were 1.88%, 8% (EFA). Long-term treasuries fared the worse since the start of the year with about 0% gains.

China stocks were also notably lower by about 3% today as a Hong Kong property investment firm, Evergrande, appears to be defaulting on $300bn of loans, surprisingly, reminding investors that global markets are interdependent and susceptible to whatever happens in China. “‘Evergrande is just the tip of the iceberg,’ said Louis Tse, managing director at Wealthy Securities, a Hong Kong-based brokerage” also noting that these bonds are US dollar-denominated and repayment is subject to any intervention by the Chinese government, which has been a theme as of late. ^2

Rising rates and market intervention risk by China increase pressure on stocks. Without the support of bond purchases by the Federal Reserve, a rate float higher would increase lending costs and reduce equity repurchases, lightening demand for stocks.

Investors have a couple of options in this new environment. As long as your time horizon remains in the intermediate to long-term, no action may be needed as you’re still very likely to outperform inflation over this time. If you need cash sooner, consider taking funds out soon to avoid locking in potential losses. Ideally, no investment should be held if you depend on this money in the short term.

At Eureka Wealth Management, I’ll keep you informed on the latest in markets and options for going forward. I also analyze retirement, insurance, and provide tax/estate strategies. Call for a free, initial consultation at (76) 537-0791 or book online at eurekawealthmanagement.com.

Sources

^1 FT 9/19/21, “Fed watchers on standby for jobs data and ‘dot plot’”

^2 FT 9/20/21, “Wall Street joins global sell-off as Evergrande crisis intensifies”