The Federal Reserve is set to raise the benchmark interest rate later today…
If the central bank does that, it will be the first initial rate hike since 1990 with the S&P 500 Index down more than 10% from its high.
And investors are looking up at a lot of storm clouds right now…
The situation in Ukraine remains on folks’ minds. Roaring inflation here in the U.S. is spooking people, too. And in recent weeks, price spikes for oil and metals have added fuel to the fire.
So not surprisingly, the market is full of fear and uncertainty…
On Monday, the S&P 500 closed at 4,173. That was just below a critical support level at 4,200. And it’s still trading near that support level through yesterday’s close.
Importantly, the bearish pattern of lower highs and lower lows continues. The index is down around 11% from its all-time high of 4,796 in early January. It’s firmly in “correction” territory.
So today, I’d like to share a bit of context. And while I don’t mean to push a “this time is different” narrative, you need to understand the current setup to avoid a classic investing mistake…
Simply put, now is not the time to try to “catch a falling knife.”
According to news outlet CNBC, the S&P 500 has endured 29 corrections since 1946 – or roughly one every 2.5 years. These corrections have lasted an average of four months. And the average recovery time to a new high is also four months.
Of course, each market cycle is different. That’s important…
The tech-heavy Nasdaq Composite Index and the Russell 2000 Index of small-cap stocks both entered bear market territory in recent days. Those two indexes have dropped roughly 20% from their November 2021 highs.
And now, the markets as a whole are facing a tough test…
The bull market that began in March 2009 was interrupted by the nasty COVID-19-induced, 33-day bear market two years ago. After that quick decline, the Fed pumped in an immense amount of cash into the economy.
But with inflation raging, the “feel good” era is about to end this week.
The Federal Open Market Committee is expected to boost the federal funds rate after its meeting later today for the first time since 2018. From there, it’s unclear what will happen…
Market observers continue to speculate about how many times the Fed will hike rates before it starts to be more worried about a recession than rising inflation.
Folks initially expected several rate hikes in 2022. But that was before Russia invaded Ukraine and before inflation continued to rise to levels not seen in 40 years.
With everything going on, one thing is clear… The Fed is in uncharted waters today.
It’s about to make its first initial rate hike since 1990 with the S&P 500 down more than 10% from its high. And it’s doing that with the economic sanctions on Russia likely to trigger unintended consequences in the world’s financial markets.
So in short, now is not the time to try to catch a falling knife.
Instead, be patient. Take a deep breath. Follow your stops. And seek out investment opportunities that have the potential to outperform in this volatile environment.
Good investing,
Marc Chaikin
