Have you’ve ever listened to economic reports in the morning on financial television, noticed they were poor, and yet the stock market actually goes up that day? You’re probably scratching your head at why this seems to be. In today’s video, I’ll explain.
When the economy’s growth accelerates past a certain point and the numbers are “too good,” the Federal Reserve will intervene and begin to raise interest rates. We’ve actually seen quite a bit of this over the last three years.
The reason the Fed raises interest rates is that fast-moving economic growth could give rise to too much inflation; higher interest rates act as a remedy to this. Now, when interest rate hikes become too frequent, investors anticipate this, and they start to sell off their stocks.
Bad economic reports actually signal that the Fed will stop raising rates. Much to the delight of investors—lower interest rates give them greater freedom to buy stocks and real estate, and it jump-starts the stock market.
Simply put, it’s all about the Federal Reserve; they’ll take a “hands-off” approach when the market appears to be down, but are more apt to issue rate hikes when the economy is gaining too much momentum.
It’s worth mentioning that the best-case scenario, though, is one of moderation; a healthy in-between would be where economic growth isn’t so rapid that it leads to the Fed raising rates, but also where we won’t slip into a recession as a result of a slowdown. In essence, we want a “Goldilocks” economy, as it’s often described.
So next time you see what you think is bad news for the economy, you’ll understand that, in most cases, it’s actually good news for your financial portfolio.
If you have any questions regarding today’s topic or if I can help you with any and all of your investment needs, don’t hesitate to contact me. I look forward to speaking with you!