The Fed Is Fighting Inflation Again. History Says Trouble, but This Time Might Be Different.
Key PointsHigh interest rates and fading economic momentum tend to be a nasty combination for stocks.
In September, the Federal Reserve increased interest rates for the first time since 2023, with a high probability of additional hikes later this year. However, the labor market added only 29,000 jobs last month, indicating a mixed economic situation. Inflation also remains high, with the headline rate increasing by 0.6% month-over-month in September to an annualized 3.7%.
Historically, when restrictive monetary policy was combined with slowing growth, significant stock market corrections occurred. Three such periods in the past involved rising interest rates and slowing economic growth, leading to major bear markets. The tech bubble burst in the early 2000s and the 2008 financial crisis are examples. However, in 2022-2023, despite high rates and slowing growth, the economy avoided a prolonged recession as inflation declined and earnings growth remained strong.
The current situation, with inflation well above target, the Fed likely keeping rates high, and a mixed labor market, could potentially lead to a stock market correction. However, corporate earnings growth and current valuations suggest that a correction might be less likely. For long-term investors, sticking with broad-market funds like the Vanguard Total Stock Market ETF (VTI) is recommended, as external catalysts for U.S. stocks are mixed.
Alternatively, looking into value-oriented funds like the Vanguard Value ETF (VTV) could provide further diversification and hedge against potential economic downturns.
Written by urgent.news from Motley Fool's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
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