Now is the time for investors to prepare for the Federal Reserve to resume interest rate hikes, which will impact global stock markets, warns the CEO and founder of one of the world’s largest independent financial advisory, asset management and fintech organisations.
The warning from deVere Group’s Nigel Green comes as Wall Street stocks fell on Thursday following better-than-expected jobs data which increases anxiety around the path of interest rates.
The Dow Jones lost 482 points, or 1.4%, the S&P 500 shed 1.4%, while the Nasdaq dropped 1.6%.
Meanwhile European stocks – the pan-European Stoxx 600 index – closed 2.5% lower.
The deVere CEO says: “Strong jobs data in the US on Thursday together with the publication of the minutes of the Fed’s last meeting, which says ‘almost all’ members of the FOMC agree that more tightening will likely be needed, has sent markets into a tailspin.
“The double whammy of the robust economic data and the Fed minutes tell global investors that the central bank of the world’s largest economy isn’t done with raising rates yet.”
He continues: “Investors don’t need to fret, but what they should do is revise their portfolios now and consider rebalancing where necessary to fit another round of Fed rate hikes.
“I would be acting sooner rather than later in this regard in order to take advantage of potentially lower entry points of high quality stocks that might have been out of favour for the last few months.”
Higher borrowing costs impact corporate profits as companies may face higher interest expenses on their existing debt or find it more expensive to finance new projects. This typically leads to a decrease in investor confidence and a decline in stock prices.
Interest rate jumps can discourage consumer borrowing and spending. When borrowing costs increase, individuals may be less willing to take on new loans for purchases such as homes, cars, or other consumer goods. This reduced consumer spending can negatively affect the earnings and profitability of businesses, leading to a decrease in stock prices.
In addition, rising interest rates make fixed-income investments, such as bonds, more attractive relative to stocks. As bond yields increase, investors may reallocate their investments from stocks to bonds, seeking higher returns with less risk.
“As we expect stock market corrections this summer, savvy investors will be speaking with financial advisors about potential winners and losers from such a fall.”
Against a backdrop of still sticky-high inflation, sectors that do well in a stagflationary environment should also be included in portfolios.
“These include commodities, such as oil, as their prices typically rise in response to inflation; consumer staples like food, and hygiene products, as demand is likely to remain relatively stable; healthcare, as it provides essential services that are less affected by economic cycles; and utilities, including electricity, gas, and water as demand will also be pretty consistent,” noted the deVere CEO recently.
“Investors should, as always, remain diversified across asset classes, sectors and regions in order to maximise returns per unit of risk incurred.”
The deVere CEO concludes: “I would urge investors to be proactive now to mitigate risks to their wealth and take advantage of the opportunities that this volatility creates.”