The United States stock market had its second worst day of the year on Friday, September 9th. This came after comments from the U.S. Federal Reserve that indicated that there was a chance that they would raise rates in September. This, along with actions by the European Central Bank just a few days beforehand, prompted panic in the U.S. markets as investors sold off their shares and try to protect earnings just in case the Fed actually does raise rates.
The worst day of the year was the day after the referendum where England decided to leave the European Union. This was a kneejerk reaction, and stocks were completely recovered within a few weeks. This is a very different situation, and the Fed does have quite a bit of influence over the stock market. When there is a rate hike, it almost always impacts stocks negatively. This impact can last for extended periods of time, or it can be a quick and painless drop in price where stock prices bounce back up very quickly.
One of two things will happen when the Fed announces their decision later in the month. They will either keep rates the same, or they will raise them. Because of the fact that the major U.S. indices dropped so much on Friday, much of the damage that would be done has already occurred. The Dow Jones Industrial Average dropped by 2.13 percent, the NASDAQ dropped by 2.54 percent, and the S&P 500 dropped by 2.45 percent. After the last rate hike in December, prices dropped drastically as well. It wasn’t until mid-March that prices had full recovered. That was three months of down markets, but much of the losses had occurred after the rate hike. It was largely predicted, but not much occurred before the hike had been implemented. If you are a Forex or binary options trader, you should still expect short term drops if a rate hike does occur, and there is a ton of potential to profit off of this, but the reaction is likely not going to be as strong as it has been in the past just because of the fact that such a strong reaction has already occurred.
The thing to learn from this is that there is a lot of power in following the news. The Fed’s decision hasn’t even come out yet, and this drop in price was because of a speculative takeaway from a comment by one of the people that will be making the rate decision. It was a noncommittal comment, but it wasn’t a strict “no.” With another aggressive rate decision coming out of Europe—one that is working better than had been expected for the euro and the EU’s economy—there is a lot of speculation that this process could be sped up.
Stepping aside from purely psychological reactions to what the market is doing, what is the Fed most likely to do? There are a number of things that the Fed committee looks at, one of them being inflation of the U.S. dollar. The dollar has experienced inflation in relation to the economy, but not at the annualized rate that has been desired. In fact, this was the primary reason why the Fed did not raise rates at their last opportunity to. The economy has improved a bit since then, but still not at the rate that has been desired. This means that there is a good chance that the Fed will not raise rates later in September, and the dramatic drops that were seen are more than likely to rebound and the indices will move upward quickly.