Retail Investors Are Shrugging Off The Fed’s Rate Hikes

Investors, pessimistic about the short term, are hanging onto hopes for long-run returns

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Retail investors haven’t blinked as stocks falter from the Fed’s campaign to tame inflation by hiking interest rates.

Some 25% of them with accounts at Vanguard bought or sold shares last year, compared with 29% in 2021, according to researchers at the company, the nation’s second-largest financial advisory firm. Those who did trade used fewer assets, and 70% bought stocks, Vanguard said, suggesting that investors are viewing the downturn as an opportunity to buy stocks at a discount. rather than panicking,

The data came even after investors and retirement savers surveyed by the company in December were pessimistic. They expected a 2.7% annual return on stock market investments over the next year, down from more than 7% in 2021. Yet their long-term expectations remained unscathed: They saw annual returns over the next 10 years hover close to 7%.

“The typical investor may just be trying to kind of put their head down and stay the course and take the long view,” said Fiona Greig, head of investor research and policy at Vanguard. “We actually saw that investors kept a steady hand in 2022, despite the volatility.”

Traders are adjusting to a new reality: The era of rock-bottom interest rates is over, and it might not come back for some time. The Fed’s campaign to ratchet up rates will turn a year old in March, and there are few signs it will end anytime soon.

Over the last year, the Fed has boosted its benchmark interest rate from near zero to a range of 4.5% to 4.75%, and has telegraphed plans for more hikes to come. Recent economic data showing stubborn inflation and a hot job market displeased policymakers at the Fed, who have said in recent speeches that more rate increases are needed. 

“I don’t think we’re seeing what we need to be seeing, especially with inflation,” Michelle Bowman, a member of the Fed’s policy committee, said Friday at a Tennessee Bankers Association Credit Conference in Nashville, according to a Bloomberg report. “I think we’ll have to continue to raise the federal funds rate until we start to see a lot more progress on that.”

Markets got the message. CME’s Fedwatch tool, which projects future rate hikes based on trading data, has it as a near certainty that the Fed will follow up February’s quarter-point rate hike with another one in March of at least that size, with chances of a 50-point hike less likely but rising.

“The crucial U.S. economic releases of this week spoke with one voice—higher for longer,” Douglas Porter, chief economist at BMO Capital Markets, said in a commentary. 

Rate hikes usually cause upheaval in the stock market, and this year has been no exception. The benchmark S&P 500 index is down 15% since its peak in January 2022, as the Fed’s hikes have had the intended effect of slowing the economy. It’s been a rough transition for retail investors, who had come to expect fat returns during the pandemic era when the Fed held interest rates near zero to stimulate the economy. Easy money policies helped fuel a bull market and even prompted many investors to dive into meme stock crazes

The lack of a sell-off bodes well for individual investors, Greig said. 

“When you pull out when markets are down, that can negatively hamper investor outcomes over the long term,” she said.

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  1. Vanguard. "Investor Pulse: Less Market Pessimism, More Economic Optimism."

  2. The Federal Reserve. "Open Market Operations."

  3. CME. "FedWatch Tool."

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