Are higher interest rates the harbinger of gloom for stocks? That is what the market news headlines are wanting everyone to believe. Well, how true is it though? Yes, interest rates have been at historic lows and this fuelled high growth stocks in 2021 to historically high valuations. The Fed's "temporary inflation" outlook proved less transitory and more embedded in the economy and so the time had arrived to deal with this using the two tools at the Fed's disposal: raising interest rates and tapering or reducing its purchase of central bank assets, essentially a reversal of its quantitative easing policies and removing liquidity from the markets.
The markets reaction was immediate and high growth stocks sold off starting in November. The Nasdaq fell from a high of 16,764 in the second half of November 2021 to 13,724 in January, a fall of just over 20% and now sits at about 14,930 today, the last day of January 2022.
"Pending higher interest rates and Fed tapering required a re-valuation of tech stocks" was the communication coming out of every media outlet. In reality, it prompted a move out of yes, highly valued tech stocks into "value" stocks that had been left behind to that point in time. A sound strategic move, one can argue.
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