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You may have seen media headlines this past year about how interest rates have gone up again and how stocks are tumbling. The interest rate hikes that the Federal Reserve has been using to combat inflation have led to pain in the stock market.
If youre an investor or interested in building a portfolio, its important to understand how rate hikes impact the stock market and your investments.
Key Takeaways
After the most recent rate hike by the Fed, we have now seen ten consecutive rate hikes since March 2022.
When interest rates go up, consumer demand decreases, which leads to companies reporting lower earnings.
When inflation is high, the cost of doing business increases for most companies. Investors become concerned about how stocks will perform in the future, so they start selling off their investments.
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The String of Rate Hikes
Whenever the Fed raises interest rates by 50 or 75 basis points, the stock market usually reacts negatively to the news immediately. For example, by the end of business on September 26, 2022 a few days after the Fed raised rates by 75 basis points the S&P 500 hit a closing low for 2022. The Dow Jones Industrial Average fell into a bear market. At that point last year, every U.S. stock market index was in a bear market as fears of a global recession loomed large.
And since then, five more rate hikes have followed. The most recent rate increase happened earlier this month and marked the third consecutive rate hike of 25 basis points.
Every rate hike in 2022 in 2023 immediately impacted the stock market. Lets look at how interest rate hikes affect stocks and the logic behind this so that you better understand whats happening right now.
Why Did Interest Rates Rise Again?
Federal Reserve Chair Jerome...