Investors should avoid panicking about the imperfect Federal Reserve’s next announcement this week and stick to basic investment fundamentals, warns the CEO of a leading financial advisory and fintech.
“The Fed, once again, is driving stock markets, investor sentiment and decision-making,” said deVere Group’s Nigel Green as the U.S. central bank begins its critical two-day meeting and widely expected to raise interest rates by another 75 basis points.
“Last week, markets were in tumult and now in a wait-and-see pattern as they look for direction,” he said.
“The Chair Jay Powell will not come out on Wednesday and sound hawkish. He will say he’s committed to bringing down inflation.”
Green said that this could translate into raising interest rates higher and faster than they once anticipated to cool off the economy and slow down prices. This also means that businesses and households face higher costs.
The FOMC economic projections and Fed monetary policy statements are expected at 18.00 GM, with the Fed rate widely expected to rise from 2.50% to 3.25%.
While some of this expectation will “already be priced-in” by the markets, it is also likely to generate uncertainty – which markets loathe – and this, of course, can create mass anxiety amongst investors.
This is a concern, according to the deVere CEO.
“Of course, investors should avoid complacency, but similarly, they should avoid panicking and responding to market reaction that is being driven by imperfect Fed policy tools.”
There is a risk that oversized interest rate hikes would cause a recession and they may not be ineffective as the soaring prices are partly triggered by external issues, which the Fed’s hikes alone will not solve,” Greene explained.
“Instead, whatever is announced by the Fed – which is guilty of grand scale inaction early on in tempering red-hot inflation – should be considered, but not given precedence over basic investment truisms.
“Investors should look to allocate cash to risk assets – thereby following the adage ‘to buy when others are fearful’ – while remaining well diversified by asset type as well as sector and geography.”
Green said that long-term investors will be using any volatility as an opportunity.
History and recent data teach us that market turbulence usually creates major opportunities to build wealth for investors who top-up their portfolios with quality stocks at lower prices, he said.
The deVere CEO concluded that the Fed will be forced to respond to the stubbornly high inflation numbers. This will drive investor anxiety again and potentially bad investment decision-making.
“As an investor, your future self will thank you for cutting out the noise right now and focusing on time-honoured fundamentals including future trends, diversification, cash flow and profitability,” Green said.