What moves markets? In my view, the Federal Reserve has more impact on the stock market than any other factor. I believe both the Great Depression and the Great Recession of 2008 were in part the result of actions by the Fed, as were the recoveries afterward.
And now, it sounds very likely that the Fed will lower interest rates at the end of this month, or if not then, very soon afterward. What might this mean for the market (and for your retirement stocks )?
The dynamic between the Fed’s decisions and the stock market’s behavior is an interesting one—in fact, I’d classify it as weird. Historically, when the Federal Reserve raises rates, we have a bull market, meaning the stock market is going up. Why is that? If the economy is improving and growing, the Fed wants to control inflation so it raises interest rates. Given that reasoning, you’d expect the stock market to trigger the Fed to raise rates, since they are an indication of a bull market.
But no, the stock market tends to respond favorably when interest rates lowered. And here’s why I say the dynamic is weird: The Fed tends to lower interest rates in order to stimulate the economy when it detects a downward trend. In other words in a general sense, lowered rates have historically signaled a coming recession. But the stock market responds well to all the “free money.” The last six times the Federal Reserve has lowered interest rates in non-recession periods, the market has gone up. But this is often a short run: Remember, the Fed could lower rates in order to jolt a sluggish economy, and that’s not a good thing.
In the short term, though, we’ll probably see a bullish market, so I believe you should be invested. I also believe that in order to make your retirement savings last , you should be diversified, and you should utilize a stop-loss strategy, like our invest-and-protect strategy, to help shield those savings against the inevitable downside.