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The Interest Rate Hike Is Finally Here (And the World Still Moves On)

uncle sam - USA

While we were sound asleep last night, the U.S. Federal Reserve finally raised benchmark interest rates by 0.25%, representing the first interest rate hike since 2006.

This comes after months of fear by investors all over the world on how markets would react to the possibility of a rise in interest rates at a time when the economies in Asia are slowing down.

When the Federal Reserve finally pulled the trigger, the S&P 500 in the U.S. responded with a 1.4% rally overnight. Meanwhile, major Asian market indexes like the Nikkei of Japan and Hang Seng of Hong Kong are both up strongly by 1.6% and 0.9%, respectively, as of the time of writing (1:15 pm). Singapore’s own Straits Times Index (SGX: ^STI) is up by 0.7%.

What is the market really thinking of right now?

In my opinion, the best description of how the stock market ‘thinks’ is captured in Benjamin Graham’s 1949 book “The Intelligent Investor.” To Graham, the stock market can be viewed as a hypothetical investor who constantly makes investment decisions under the influence of emotions like fear, greed, euphoria and apathy. In other words, we can view the stock market as a border-line madman.

If that’s so, what would happen if you’re constantly trying to make logical sense of the short-term reactions of the market to events? It’s likely that you’d become a mad person too.

There were media reports that surfaced last month on how the stock market had fallen due to the fears of a possible interest rate hike. Yet, after a hike became a reality yesterday night, the market rallied strongly, as was alluded to earlier. It almost seems to me that the market was fearing the idea of an interest rate hike more than an actual rise in rates.

As investors, we might want to take the advice given by former U.S. President Franklin D. Roosevelt in his 1933 Presidential Inaugural Address: “The only thing we have to fear is fear itself.” Although Roosevelt was speaking about the hardships Americans were facing during the great depression of the 1920s and 1930s, his words still ring true today when it comes to investing.

Instead of getting influenced by the emotions that are prevalent in the market, we have to learn to recognize them and use them to our advantage.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim doesn't own shares in any companies mentioned.