Interest Rate News Drives Stock Market Activity

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If you watch the market during the day, you will soon see how it reacts to news and events. Sometimes the news is expected, but when it surprises the market things can get exciting.

It seems to me that the market usually reacts more strongly to bad or unexpected news than it does to good news. That may not stand up under research, but either way the unexpected is always a market mover.

The most common announcements come around economic indicators. Whether it is unemployment, consumer sentiment, wholesale prices or other regular indicators, it pays to know when new information in coming (all indicators are scheduled).

Single Indicator

No single indicator predicts the market’s direction, but there is one number that every investor should follow, even though it is often speculation that moves the market.

I’m talking about interest rates. The movement and direction of interest rates has a dramatic effect on the market.

The primary interest rate we here about is that which is set by the Open Market Committee of the Federal Reserve Board. This group meets eight times per year, however their influence is much more frequently felt in the market.

The Fed controls the key interest rates bank charge each other for overnight deposits. This interest rate — the Fed funds rate — is used as a benchmark for many other interest rates.

Most Attention

It gets the most attention and directly or indirectly affects most other major interest rates.

The Fed uses interest rates to do two things: First, lower interest rates can stimulate the economy by making it easier for businesses and individuals to borrow money and; Second, higher interest rates slow down the economy, which is the primary weapon to keep inflation in check.

The market never waits for the Fed to act. Investors are constantly looking for clues as to whether the Fed intends to raise, lower or hold interest rates. Minutes of previous meetings and statements from the Fed or any of its officials are studied for clues.

While it is not in the long-term investor’s best interest to speculate on interest rates, it is important that you remain aware of trends. Are rates trending up, down or holding steady?

The answer to this question can help you anticipate how changes will affect your portfolio. Holding or buying stocks that are interest-rate sensitive (the housing industry, for example), may be a good or bad idea depending which way rates are trending.