U.S. Interest Rate Hike May Be Delayed Due To China’s Devalued Yuan – Is That Good Or Bad For Investors?

Oh, how the tide has turned.

About a year ago, there was an outpouring of concern over the possibility of the U.S. Federal Reserve hiking interest rates. As the prevailing logic goes, the stock market may fall if interest rates were to rise.

In a surprise move yesterday, China’s central bank moved to devalue the Chinese yuan by nearly 2%, sending the financial media into a frenzy. (In the name of staying updated, China’s central bank had trimmed the yuan by a further 1.62% earlier today).

In response to the first round of devaluation, one financial strategist suggested that the devaluation may led to a delay in the Fed’s plans to increase interest rates. If you follow my aforementioned logic about the relationship between interest rates and stocks, a pushback in any rate hikes should be a positive thing for the stock market.

And so…… the U.S. based market barometer, the S&P 500, proceeded to fall by almost 1% yesterday night.

Wait, what?

To be sure, interest rate movements may have an impact on some industries and companies. But, the above example is a great instance of how there may not really be an easily discernible cause-and-effect chain between interest rate movements and stock market movements. Taking this to its logical conclusion, making your Singapore stock market bets based on the Fed’s decisions with interest rates may be a move that’s full of folly.

The longer view

Thing is, there’s not much to worry about if we take a longer view.

It’s worth noting that the SPDR STI ETF (SGX: ^ES3) – an exchange-traded fund tracking Singapore’s market benchmark, the Straits Times Index (SGX: ^STI) – has returned 8.11% annually (with dividends reinvested) since its inception on 11 April 2002. And, it has done so during a period when the Fed had hiked its interest rate to as high as 5.25% and brought it to as low as nearly zero. You can see this in the chart below.

2015-08 Fed Rate

Foolish take away

As individual investors, we can’t control what happens in the global economy and the stock market. But we can control our reactions to them. Would you rather chase the financial news the same way a kitten chases a moving laser pointer? Or would you stay the course and invest with the long-term in mind?

Personally, I would prefer to spend my time on the latter. How about you?

Let me know what you think by meeting David Kuo and the rest of the Fool Singapore team on August 15! 

Please join us at Invest FAIR Singapore on 15 August. (Suntec Centre, Booth B-16). Come chat with us at our booth, and see our MAS-licensed Director, David Kuo, give his official SGX investor presentation.

You won't want to miss this! Add Invest FAIR Singapore to your calendar today.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.