The Federal Reserve of the United States announced a 0.25% increase in interest rates in early February 2023, with the policy rate ranging between 4.5% to 4.75%, in line with market expectations and marking the second consecutive decrease in the rate of increase. The market anticipates the end of the interest rate cycle, and the Hang Seng Index, S&P 500, and Nasdaq all rebounded and recovered from some of their losses last year.
Since last year, the Federal Reserve has raised the federal funds rate by a greater magnitude six consecutive times in response to the highest inflation in 40 years. As inflation eases, the Federal Reserve no longer needs to increase interest rates aggressively. With less pressure to raise interest rates, investment markets will not be as turbulent as they have been since last year, which is more beneficial for long-term investors and helps avoid market volatility.
Positive Signs to the Stock Market
One of the primary benefits of the Federal Reserve slowing rate hikes is that it can make borrowing cheaper. It can be good news for businesses that need to take out loans to fund new projects or expand their project, leading to higher earnings and stock prices. As a result, stock investors may see an increase in the value of their portfolios. Lower borrowing costs can also make it easier for individuals to borrow a stock loan or a personal loan for investment.
From the beginning of the year until 14th February, the Nasdaq rose by 13.54%, the S&P 500 went up by 7.20%, the Hang Seng Index surged by 4.8%, and the Shanghai Composite Index climbed by 5.67%.
In addition to the stock market rebound, the bond market performed very well. According to Bank of America, EPFR statistics show that in the past weeks, investment-grade bonds, emerging market bonds, and high-yield bonds all saw net inflows of funds, and the momentum of the funds has picked up.
China’s recent reversal of its border closure policy has also significantly boosted the economy. Meanwhile, the Chinese government has been taking active measures to alleviate the real estate crisis since last year. Both efforts stimulate a significant increase in Hong Kong and A shares in 2023.
Market Volatility and Future Prospects
However, some analysts hold a pessimistic view of the stock market rebound, pointing out that the U.S.’s anti-inflation process may only be temporary and that even if the magnitude of interest rate hikes is reduced due to the unexpected growth in U.S. employment, policies to fight inflation through interest rate hikes will still be difficult to stop. It is expected that the U.S. will maintain high-interest rates for a long time, and the economic fundamentals may deteriorate again by the end of the year, and the current rebound in the market is seen as just a “bear market trap.”
Another potential concern is that lower interest rates can make it harder for savers to earn a decent return on their safe investments. As yields on savings accounts and CDs decline, finding a safe place to invest that will generate meaningful returns can be challenging.
Avoid Blindly Following Hot Stocks
During a stock market rebound, many previously lagging sectors suddenly become popular, such as the surge in several tech stocks at the beginning of 2023. Investors who get in early can buy those stocks at a discount and gain profits as the market continues to recover.
Remember, short-term trading when the market rebounds requires a keen eye and some luck, but if you believe that the economy has improved and has been entering a new bull market, you should establish a balanced portfolio before the stock market fully recovers. Diversify your investments across different sectors, such as stocks, bonds, gold, deposits, and cryptocurrencies, to reduce asset concentration risk.