ver the last several years, Wall Street has operated under the assumption that when the Federal Reserve raises interest rates, stocks drop in price. Interest rates impact the
price of the dollar, and when the rate goes up, it is more profitable to focus on the Forex market. The general rule that has been followed is that when
interest rates go up, it drives the dollar up, and stock prices go down.
That theory, although a longstanding tradition, is only just a theory. And it’s one that is being tested right now. The Fed raised rates earlier in March, but there has been almost no impact on the stock market. Overall, the Dow Jones has fallen by a bit more than 200 points in the last few weeks off of its highpoint. The Dow had just recently crossed 21,100 for the first time, and as of closing on Friday,
March 17th, was sitting at just under 21,000. It was a drop of less than 1.2 percent in the course of two weeks, and some analysts are already announcing that that will be the end of it. Whether that’s true or not is something that will remain to be seen. However, it should be noted that the last rate increase also had an almost imperceptible impact on the stock market. Higher rates mean that it is more costly for businesses to borrow money and expand, and although expansion is still occurring, the rate of this will eventually need to slow down. It’s hard to judge the full impact of a rate hike until a few months after the fact, but some experts in this area are already commenting
that the Dow has been relatively unscathed. Other indices are following suit.
For us traders that try to put together a long-term view of what is going on so that we can have a more effective short-term approach to our trades, it’s tough to know what the Federal Reserve is going to do moving forward. If the stock market is continuing to move ahead at such a torrid pace, it is realistic to expect another rate hike before the end of the year. With a new president in office, stocks have soared, and much of that is in response to the fact that President Trump is perceived as being good for business.
While long-term call options seem like the best choice, especially in the wake of a rate hike, it is hard to know exactly what to do. Yes, this seems like the best choice now, but if the Fed does take on a more proactive stance, it is tough to know exactly how that will impact the stock market. Keep your eyes open and be prepared to act when appropriate. Some analysts believe that the Fed is likely to raise the benchmark rate each of the remaining three quarters in 2017. While the last two rate hikes may not have had the desired impact, it is very likely that if they are to occur more frequently than this will change. Because the cost of borrowing is going up, companies eventually must slow down and start relying on what they have produced naturally. A viable long-term trading strategy needs to take these things into account, all while looking at each short-term opportunity that arises.
On a final note, if you use an automated trading service, be sure that the software you use is keeping up with the changing economic situation. Oftentimes trading robots rely on set technical indicators and do not take news or fundamental changes into account.