Market pullbacks never feel good but are required for a healthy market. The first pullback this year was in February. Since then, the market has recovered and moved higher. It is not easy to see a dramatic drop in the market, especially in such a short time period. Part of the reason for this sudden drop is the quick rise in interest rates. In the beginning of September, the interest rate was 2.90%
The Federal Reserve (Fed) has been gradually moving interest rates up. The goal is to keep our nation’s economy moving ahead while maintaining a 2% – 2.5% inflation rate. In a normal environment, the 10-year interest rate should be between 3 and 4%. We have had artificially low interest rates for some time. It is expected that volatility will continue until we reach a slowing of or end to rate increases.
The fear of wage inflation has caused interest rates to rise quite rapidly in the last month. This concerns investors because they fear that the Fed may need to raise interest rates more quickly than the three increases already anticipated for this year.
The problem is twofold: While the Fed tries to balance inflation with interest rate increases (which decreases the value of bonds), the low unemployment rate is working against them by causing employers to raise wages to keep and attract qualified workers. This causes inflation. The result is a delicate balance between the two opposing aspects of the economy. This friction has caused investors to become nervous, expecting either inflation or interest rates to move to quickly. If the Fed oversteps its interest rate move, it could signal a slowdown in the economy.
LifeSteps Financial Insight
We do not foresee wage increases or interest rate hikes deterring a longer-term bull market. The economy is strong and continuing to grow. A key to successful long-term investing is to have a well-balanced, diversified portfolio and to be prepared with a plan in the event of an unexpected outcome.