AE Wealth Management: Market Minute Blog | 5/5/22


Markets jump one day – and plummet the next

On Wednesday, May 4, the Federal Reserve raised rates by 50 basis points (.50%), its biggest hike in 22 years. The Fed had raised rates for the first time since 2018 at its March meeting, moving the Fed funds rate from 0.0 to 0.25%. The latest increase moves the rate from 0.25% to .75%.

Markets were in a less-than-positive mindset going into the meeting, focused on issues such as high inflation and negative gross domestic product (GDP) growth in the first quarter. So when Fed Chair Jerome Powell announced they were raising rates by 50 basis points and planned to limit the hikes in June and July to 50 basis points, markets seized on the seemingly positive news and went wild. The Dow rocketed nearly 1,000 points late in the trading day on Wednesday, while the S&P 500 gained 2.99% for its biggest gains since 2020.

But the celebration didn’t last long. Markets did a complete about-face on the morning of Thursday, May 5. What caused the 180° turn? After mulling over Chairman Powell’s remarks, markets decided they don’t trust his claims that the Fed will stick to a 50-basis-points increase at the next two meetings, believing that the Fed will go with a more aggressive increase of 75 basis points instead.

As a result, Wednesday’s gains turned into Thursday’s losses. By noon, the Dow had lost 1,100 points, while the S&P 500 fell 3.7% and the Nasdaq dropped by 4.9%. It was the worst trading day of the year so far, representing an unusual 100% reversal from the previous day’s results.

The prevailing concern is that we could be headed into the perfect storm, one from which there may be limited shelter. Anemic policy could lead us to prolonged market and economic pain that may push us from our current low-growth, high-inflation environment into a recession. However, raising rates too aggressively could also have a similar effect.

As an investor, what should you do in this current environment? Remember that this is why you invest for the long term, and you haven’t lost anything until you sell. Make decisions based on the big picture, not day-to-day events that are driving volatility. Talk to your financial advisor and make sure your portfolio is aligned with your risk profile. Times like these test your mettle as an investor, but patience and perseverance can help you navigate uncertainty until markets come back up.

5/22-2187928 This is provided for informational purposes only. This information is not intended to be used as a sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation. None of the information contained herein shall constitute an offer to sell or solicit any offer to buy a security.

Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.