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Markets Did the Worrying Before the Fed Acted
Hoxton Blog • Markets Did the Worrying Before the Fed Acted
This week, the biggest market story was one everybody saw coming.
The US Federal Reserve raised interest rates for the first time since 2023, lifting its benchmark rate by 0.25 percentage points to a range of 3.75% to 4.00%.
Almost nobody was surprised by the decision itself. What was far more interesting, and far more useful for investors, was everything that happened around it. Markets had spent much of the week dealing with rising bond yields, oil above $100 a barrel and the prospect of tighter monetary policy. Then the Fed made its move and attention quickly shifted to what might happen next.
There is an important lesson in that. Markets do not simply react to events. They react to the difference between what investors expected and what actually happened.
Bond Yields Hit Their Highest Level Since 2007
In the days leading up to the Fed's decision, the yield on the 10-year US Treasury climbed above 5%, eventually reaching its highest level since 2007. That matters because Treasury yields influence borrowing costs far beyond the bond market, from mortgages and car loans to the cost of financing for businesses.
Oil, still rising on the back of the Middle East conflict we wrote about last week, pushed above $109 a barrel and added to the pressure. Markets knew the Fed was likely to raise rates. The bigger question was what policymakers would say about what came next.
Zoom out, though, and this week's move barely registers. The chart above tracks the US Bloomberg Aggregate Bond Index, a broad measure of investment-grade bonds, all the way back to 1976. Rising yields push bond prices down, which is exactly what happened this week, yet the index has still compounded from a base of 100 nearly 50 years ago to over 2,300 today, climbing through periods with far sharper rate shocks than this one.
The wobble that dominated this week's headlines is a rounding error on a 50-year chart, not a break in the story. That does not mean short-term falls do not matter. They do. But it shows the danger of allowing a few difficult trading sessions to dominate your view of a long-term investment plan.
The Fed then delivered the increase markets had been expecting. Stocks initially fell and Treasury yields rose following the announcement, as policymakers signalled that further tightening may be needed. By Thursday, however, the picture had shifted again. Treasury yields and oil prices eased, while US stocks rebounded strongly.
That is the point. A move that is widely expected does not necessarily determine what markets do next. What matters is how the event compares with expectations and, just as importantly, what investors think will happen after it.
Oil Told a Similar Story
Oil followed a strikingly similar arc. Brent crude pushed above $109 a barrel during the week as damage to Saudi Arabia's East-West Pipeline, an important alternative route for exports that bypasses the Strait of Hormuz, added another threat to an already difficult supply picture.
The pipeline matters because it allows Saudi crude to reach the Red Sea without travelling through the Strait of Hormuz. With movement through the strait already severely disrupted, damage to that alternative route raised concerns that global supplies could become tighter still.
Saudi Arabia responded by working to restore part of the pipeline's capacity while finding alternative ways to maintain exports, including additional shipments via Oman. Brent subsequently fell for three consecutive sessions and closed Friday at $104.87 a barrel.
The risks have not disappeared. Repair estimates vary and the wider geopolitical situation remains highly uncertain. But once again, the initial headline was not the whole story.
Markets spend every day trying to price tomorrow. By the time something reaches the front page, investors may already have spent days or weeks reacting to it. What happens next can matter just as much as the event itself.
Stocks Fluctuated, But Didn't Break
US shares fell around the Fed decision as investors dealt with higher yields, expensive oil and the prospect of further interest-rate increases. On Wednesday, the Dow fell 1.21% and the S&P 500 lost 0.44%, while the Nasdaq was essentially flat.
The damage was uneven. Technology was actually the strongest-performing S&P 500 sector on Fed day, and on Thursday technology led a broader recovery as oil and Treasury yields eased. The Nasdaq rose 1.69%, the S&P 500 gained 1.14% and the Dow added 0.62%.
That unevenness matters because very few investors should have their financial future resting on one company, one sector or one particular view of where interest rates go next.
The chart above puts this week into a longer historical context. Going back to 1958, there have been 11 previous occasions when the Fed began a new cycle of rate rises. The S&P 500's return over the 12 months that followed has ranged from as strong as +18.3%, after the first cycle in the chart, to as weak as -11.7%, after the cycle that began just before the 1987 crash. The average across all 11 is a modest +1.4%, which tells you less than it seems to. The outcomes cluster on both sides of that number, not around it.
Just as tellingly, the eventual 12-month figure was rarely the whole story. In nearly every cycle shown, including several that ultimately finished positive, stocks fell much further at some point along the way than where they ended up, in the 1987 cycle by more than 30% peak to trough.
History offers no reliable playbook for what stocks do after a first rate rise. It does, however, make a strong case for not needing one.
That is where diversification matters. Diversification cannot remove risk and it cannot guarantee positive returns, but it can reduce your dependence on one company, one sector, one country or one market outcome. Your financial future should not depend on correctly guessing which part of the market will perform best next.
Central Banks Are Back in Focus
The Fed is unlikely to disappear from the headlines. Its latest projections showed that 16 of 18 policymakers expect at least one further rate increase before the end of this year, although future decisions will depend on how inflation and the wider economy develop.
Elsewhere, the Bank of England kept Bank Rate unchanged at 3.75% this week, while signalling greater concern about inflation and the possibility that rates may need to rise. In Japan, the Bank of Japan raised its policy rate to 1.25%, its highest level in 31 years.
Different countries face different circumstances, but the broader message is clear. Inflation and interest rates are firmly back on investors' radar.
That does not mean your portfolio needs changing every time a central banker speaks. It means your financial plan needs to be capable of living through different interest-rate environments.
What Does This Mean For Your Money?
For anyone with a mortgage, a car loan or credit card debt, higher interest rates are not simply an abstract market headline. Borrowing costs can rise, businesses can find financing more expensive and higher energy prices can add further pressure to household budgets and inflation.
For savers, higher interest rates can make cash look more attractive too. There is nothing wrong with holding cash for the right reasons. An emergency reserve, planned spending or money needed in the short-term should not be exposed unnecessarily to investment risk.
But cash and long-term investment capital have different jobs.
Over long periods, inflation can erode the purchasing power of money held in cash. Investments involve risk and can fall in value, but a diversified portfolio gives long-term capital the opportunity to grow. The important question is not whether cash or investments are universally better. It is what each part of your money is there to do.
The Timeframe That Is Important
Two weeks ago, oil breaking $100 was the headline. This week, investors were watching the highest 10-year Treasury yield since 2007 and the first Fed rate rise in more than three years. Next week, attention will move somewhere else.
That is not a reason for alarm. It is simply what markets do. The specific headline changes from week to week. What does not change is the value of holding a portfolio built to absorb different market conditions rather than one that depends on correctly guessing the next headline in advance.
That is the real job of financial planning, and it is how we approach things at Hoxton Wealth. We build diversified portfolios across markets, regions and different types of investment, aligned with each client's circumstances, goals and comfort with risk.
The aim is not to eliminate volatility, because no investment portfolio can do that. It is to make sure short-term market noise does not automatically become a long-term financial decision.
Our Message This Week
A Fed rate rise that markets had been expecting, oil moving sharply in both directions and a stock market that fell before rebounding all point towards the same lesson. The headline alone rarely tells you what markets will do next.
Trying to predict every twist is not a financial plan. Holding a portfolio designed for uncertainty is a much more useful starting point. If this week's moves have made you question whether your investments are positioned appropriately for your goals, speak to us.
We can review your plan, your level of risk and whether anything genuinely needs to change. You can reach us by email at client.services@hoxtonwealth.com or on WhatsApp at +44 7384 100200.
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If you would like to speak to one of our advisers, please get in touch today.
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