Game of Trades: Stock Market Investors Are Not Positioned for What’s About to Happen

Right now, the economic consensus is that things are slowing. And central bankers are raising interest rates into a recession. Typically, interest rate hikes occur when the economy is doing well, not when it is faring poorly.

The stock market tends to start dropping ahead of an actual recession in anticipation of one. And when that happens, markets become extremely sensitive to changes in interest rates. That’s the situation playing out today.

Right now, interest rates are rising off of a Fed Funds Rate of 0 percent. Coming off that number, any change appears massive on a percentage basis.

And with more rate hikes likely in the coming months, investors could be in for more pain in the stock market.

That could be similar to market moves similar to those in 1969 or 1973, when short-term interest rates rose while markets tanked. That suggests the current bear market may retest its recent lows, and may even drop further.

With the market consensus already pricing in a recession, it may be too late for investors to benefit from following the trend. Investors had a consensus in April 2020 about a recession, right as the stock market bottomed. And in March 2009, also when the market bottom was in after the housing bust.

With a similar consensus today, there may be some short-term downside, but markets could see a contrarian move higher in the coming months. That will most likely happen after the Federal Reserve stops hiking interest rates.

To view the full video on this potential counter-trend, click here.