Home Financial Stocks Three Results of Rate Increases and Market Volatility

Three Results of Rate Increases and Market Volatility

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After years of lowering rates, the Federal Reserve (Fed) has begun to increase rates toward a goal of 3.5%. The slight increase made by the Fed doesn’t amount to much, but investors are reacting to the news that the Fed is looking to increase the rate further over time. As the Fed increases rates, and the stock markets react to their actions, investors should understand how these actions may impact their personal investment holdings.

Falling Financial Stocks

Financial stocks, such as retail banks and auto lenders, generally suffer stock value declines when the Fed increases rates and when the market as a whole is in decline. This is due to people being less willing to borrow money when rates are higher and less borrowing occurring during periods of economic decline. Investors in financial stocks should pay close attention to their investments in financial stocks during this time.

Gold and Cryptocurrency

In times of market volatility, many investors seek safe places for their money and other alternative investments. Both gold and cryptocurrencies are popular outlets for investors when there is fear in the market. As neither gold nor cryptocurrencies are subject to Fed interest rate hikes or other sources of volatility, investors may see increases in value for both gold and other precious metals as well as Bitcoin, Ethereum and other cryptocurrencies.

Fear Creates Buying Opportunities

When there is fear and panic in the market, market values generally fall faster than the numbers suggest. For example, a 3% decrease in sales does not usually mean that the stock value should fall by 20%, but this happens all the time. As a stock’s value begins to fall, some investors will panic and sell. This panic selling further pushes the value down and more investors sell. When prices fall beyond what the numbers suggest, stocks often trade at a discount to their fair value and may create a good investment opportunity.

Careful research is always needed to make good investment decisions. However, market downturns can create especially good buying opportunities. Investors who are able to keep their heads and invest based on rational decisions, and not fear, can find areas of value where serious profits can be made.

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