Last year saw the Federal Reserve increase the benchmark interest rate at least seven times. That's how the federal funds rate closed the 4%, the first time this has happened since the economic upheavals of 2008. This rate cycle coupled with the post-pandemic conditions and the worsening liquidity conditions means that investors may need to be watchful for longer.

The central bank may continue with its interest rate interventions this year, as already evidenced by recent reports. The system has just announced that it has increased the federal funds rate by 0.25%, so the interest rates vs. stock market debate may not go away any time soon.

Market Forces at Play in 2023

The cycle of Fed rate hikes does impact the stock market, but there are other forces. These are the ever-present inflation, geopolitics, post-pandemic issues, and China's economy.

Fed Rate Increases

Most of the volatility in the stock market in recent times emanated from concerns about the Fed rate hikes. Even as recently as December 2022, the Fed announced that it would continue on this path. However, the market didn't expect any action until around March. So it is safe to say no one can tell the aggressiveness of the hikes going forward. Although the market condition is not entirely dependent on these rates, the unpredictability is causing volatility, hence traders must stay alert.

Perpetual Inflation

There were signs that the US market was rebounding, but all that seems to be waning. Inflation is so stubborn that consumers are on the brink of losing hope. The services sector is now at one of its worst levels ever. Given the expectations of an economic slowdown, it is expected that fuel costs will continue to rise. Other items and services are also bound to cost more.

Post-Pandemic Challenges

Another force worth mentioning is the re-pricing surrounding the recent pandemic. Some firms are no longer as popular as they were at the height of the pandemic. After years of dominance, growth stocks are paving way for value stocks. As normalcy returns, companies that seemed done and dusted could recover. Therefore, traders had better rethink some of their strategies this year.

China Economy and Russia-Ukraine Conflict

Then there is the issue of global conflicts. The Russian stocks are worth watching, as is the situation in China, particularly the opportunity for contrarian trade.

The Opportunity in Volatility

Volatility in the stock market is not necessarily unpleasant, as it can offer opportunities for traders. Traders who like to look at the long-term market outlook may want to buy in companies that they like when the prices are low. The understanding is that the stock market will eventually recover.

The same strategy can apply when there is a sudden spike in stock prices. A trader can opt to sell out and invest the money made in other areas or stocks. When the stock market is volatile, valuations are likely to be friendlier. Consequently, the chances of making decent returns in the long term are higher.

Why is a long-term view of the market necessary?

First, predicting the stock market is next to impossible. Whenever a trader tries to time the market, there is a high risk of making losses. It is better to remain focused, than get into the timing strategy and fail. Timing is riskiest during stock market volatility.

The best companies have robust fundamentals, so they tend to perform well even when the volatility is high. The stock price may not indicate this immediately, but these companies will always emerge stronger. This may not be said for emerging companies, which can experience an unsustainable increase in stock prices. Stock investors can again come in and invest in such companies during these fluctuations in readiness for aggregate growth later.   

Conclusion

This is probably the most important lesson that a stock market trader can ever have: Volatility is normal. Basing the entry or exit from the market on this element alone can be disastrous. One had better watch closely before acting.

Despite the chaos that may be in the stock market, there could be investment opportunities, but only for those who understand how volatility relates to the interest rate and other factors.