One of the reasons why timing the market is perhaps one of the worst decisions an investor could make is because no one exactly knows when exactly will the market overperform or underperform. Most of those who tried to time the market, have generally lost most of their investments. The Federal Reserve recently raised interest rates on March 22 to continue fighting against inflation. The expected reaction from the market to this monetary policy was a substantial decline in the value of investments. Indeed, when interest rates are high, asset prices are expected to decline, which depreciates the value of investments of the investor. However, this is not what we’ve been witnessing since the recent rate hikes. The stock market is more resilient than ever. Why is that?
Source: Dow Jones
It's all about how investors feel about interest rates. On March 22, the S&P 500 was at 2.5%. As of April 18, the S&P 500 grow to 8.2%. This is an increase of 228% in nearly a month. What is even more interesting is that the heavy-tech Nasdaq has been outpacing the S&P 500 by a wide margin, and is now in bullish territories. The market has been rallying because investors have been displaying an optimistic sentiment about interest rates. They are confident that the Federal Reserve will soon cut these rates, which will create more opportunities for the value of investments to increase again. However, Fed Chair Jerome Powell made it abundantly clear during his last press conference that the Fed will continue to relentlessly fight inflation until it is brought back to 2%. Realistically, we don’t know if Powell will be sustain this draconian path because this means that will have to keep increasing inflation a few more times, and this could then trigger a recession. Unless triggering a recession is perhaps what he secretly wants.
Beyond the positive sentiment that investors have been exhibiting toward interest rates despite the hike, companies have been increasing their earnings. According to Bankim Chadha, Chief U.S. equity and global strategist at Deutsche Bank, stronger-than-expected first-quarter earnings and a weakening U.S. dollar will help the stock market rally in the near term. Equities historically tend to rise as companies report fiscal results, and a series of macroeconomic drivers are stacking up in the market's favor. As the U.S. dollar weakens, companies that do business overseas should see a boost in sales. The rise in corporate earnings suggests that the basis of consumer demand remains strong. Sales increase because there is a demand for the products and services being sold. This means that consumers’ confidence remains strong despite a tighter credit market. The Fed meeting in May shall be a very critical one. While we expect this meeting to result in another rate hike, this forthcoming rate hike could be the last one. At least, hopefully. And the threat of a recession still looming over the economy.