Investors who are banking on the Federal Reserve lowering rates may be in for a surprise if they continue to rise, warns YouTube financial analyst Graham Stephan. He points out that major shifts in the markets happen on news about any movement in interest rates, but notes that investors have become complacent in betting that rates will fall as it moves to a “risk on” position next year. However, if interest rates do rise, investors will need to be more careful with their portfolios, especially if they hold companies with significant debt. Stephan suggests dollar cost averaging as a sensible approach to this unpredictable situation.
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The Potential Impact of the FED’s Decision on the Market
In recent times, a lot of people have been expecting the FED to pivot, and whenever we get any news about inflation or anything related to the FED increasing or decreasing rates, we generally see two to five percent moves in a single day. As a result, many people are banking on the theory that we will rotate to more risk next year, and the market will continue to recover due to interest rates. However, what if the FED doesn’t lower rates? In this article, we will discuss the potential impact of the FED’s decision on the market.
Possible Scenarios
Currently, investors are pricing in expectations for a five percent terminal rate for the FED funds rate, which suggests that they expect the FED to raise interest rates until inflation comes down or until unemployment goes up. However, some famous investors and economists are saying that the FED will have to raise rates more because of some poor economic indicators.
At the next rate hike, we are expecting 50 basis points, which would bring us up to 4.25 to 4.5 percent, while a couple of meetings down the line, the terminal rate is expected to be in the mid fives. However, this might not be a good guess for where it’s going to be, and it could be higher. If the FED raises rates aggressively, we could see a possible six percent federal funds rate, which would be higher than most people are expecting.
Potential Impact
If the FED raises interest rates continuously, it could have a significant impact on particular companies. For instance, companies with high levels of debt, especially those without strong pricing power, will be affected more. They may struggle to raise the cost of their goods with inflation, and it could become harder for them to borrow money due to high rates.
Another industry that could be impacted is the crypto industry. Specifically, Bitcoin miners could be adversely affected as the profitability of mining Bitcoin goes down with increasing rates.
Conclusion
In conclusion, while many people are betting on the FED changing and flipping, it is essential to prepare for any eventuality. The FED’s decision could impact the market in significant ways, and it is necessary to be cautious while investing. It is best to look for companies with strong balance sheets and pricing power as we move forward.
