Stocks Suffer Massive Selloff in Response to Rate Hike

Stocks are down and Wall Street analysts are still finding it hard to understand the fundamental reasons behind the selloff in the U.S. equities market. On Wednesday, I revealed that that the U.S. Federal Reserve was about to round up a two-day policy meeting. I also mentioned that the odds that the feds would announce an increase in interest rates are high. The feds acted in line with my submission and it announced that it has raised Interest rates by 25 basis points.

Stock Market Down

The fed’s decision to raise interest rate has been the subject of much speculation for much of the last 11 months. The eventual hawkish move from the fed marks the first rate hike in a year and the second increase in interest rates in 10 years. More interesting is the fact that the Fed has hinted that it would raise interest rates by 0.25% three more times next year. Today’s post examines the reason behind the selloff in stocks after the increase in Interest rates.

U.S. stocks suffer selloff after feds raise interest rates

Stock Chart Dec 14

The chart above shows the performance of the major U.S. market indexes after market close in the wake of the fed rate hike. The S&P 500 ended the session with a massive 0.81% decline to end the session at 2,253.28 – it made a session low of 2,248.44. The NASDAQ ended the session with a 0.50% decline to end the session at 5,4365.67.

The Dow Jones has been on an impressive rally in the last couple of weeks after Donald Trump’s surprise victory spurred a rally in stocks. Dow was on a record-breaking rally and the index was only a few precious points from breaking the 20,000 record. The Dow however recorded a loss of 0.60% in response to the rate hike. Dow ended the session at 19,792.53 and it seems that the rally to touch 20,000 might wait some more.

However, small caps stocks suffered the biggest losses in response to the increase in Interest rates. The Russell 2000, which tracks small stocks was down a massive 1.27% to 1,356.02 after the news of the rate hike broke. Small caps scored big gains in the wake of Trump’s surprise victory because traders and investors believed that the tax cuts that Trump proposed would benefit small cap stocks. The rate hike will scrape some value away from small caps before tax cuts come into effect next year.

Where are stocks headed going forward?

Going forward, analysts expect stocks to return to bullish ways once the dust of the rate hike settles. Nonetheless, we cannot water down the fact that the fed’s decision to raise interest rates appears to be a proactive (read preemptive) move in response to the proposed economic policies of the next administration.

However, I think that the first rate hike didn’t cause the selloff in stocks , it seems that the plan to raise interest rates three more times next year was the main culprit behind the selloff in stocks. Many investors expected the fed to raise interest rates at its December meeting but very few people expected three more rate hikes in 2017 after interest rates stood unchanged for almost one decade.