How does the FOMC interest rate announcement affect the overall stock market?
source: yahoo finance
On 14 Dec 2022, the fed announced an increase in the interest rate by 50bps from 4% in November to 4.5%. This federal fund rate(interest rate) increment was expected according to the median result of the US Fed dot plot participants. However, despite the increment being “priced in”, there was still a wide dip in market value in S&P, QQQ, and Dow. The bearish sentiment carried on for 2 days after the announcement.
These dips caused by momentary macro factors are nothing to be alarmed at if you have an investment timeline of more than 5 years.
Are the Bearish sentiments over-sensationalized?
If you have been following the stock market in 2022, you have probably been seeing a sea of RED. Every day you have probably been bombarded with news about how the stock market has hit an all-time low…
But is it as bad as it seems?….
The top two graphs show a rough average price of the stock market in the month of Jan 2020 to DEC 2022. The price was pitted against inflation and interest rate. As you can see the performance is not really that terrible if we were to take a step back and look at it from a longer time horizon.
Let me remind you what happened from 2020 to 2022,
- Covid lockdown,
- Supply chain issue
- Anti-work movement
- Work from home/4 days workweeks.
- Food shortages (prior to the Russia-Ukraine war)
- Intensify chips/ trade war with China
- Russia-Ukraine war
- Energy crisis
- Rampant inflation
- High-interest rate
- Digital economic Tech layoff.
- Shortage in labor in the real economic eg. small business, retail, warehousing
- Billions of personal/household savings got wiped out in crypto/NFT scams or winter.
Conclusion
In my personal opinion, continuing to DCA into a broad market index fund is the way to go if you are a long-term investor. The news & online financial gurus have over-sensationalized every single market uptick and downtrend. It’s all just noise, to be honest
