The ASX share market is up today, following on from gains in the US share market. That comes after the US interest rate increased another 0.75%.
The US Federal Reserve is doing everything it can to get on top of the inflation situation. The latest monthly data showed US inflation showed 8.6% year on year growth in May. This was even more than April, which was already very high.
Higher interest rates are meant to hurt asset prices. But guess what? The S&P 500 Index rose around 1.5% overnight and the S&P/ASX 200 (ASX: XJO) is currently up by 0.6%.
The Fed’s 0.75% is the biggest increase since 1994. Federal Reserve members think that the US interest rate could end the year at 3.4%. US GDP is now only expected to grow by 1.7% in 2022, a reduction of guidance from 2.8% from the expectation in March.
Why would share prices rise?
The ASX share market is usually forward-looking. That means that investors were already expecting a large interest rate increase, it wasn’t a surprise. The ‘market’ doesn’t like negative surprises (like global pandemics).
Some investors may have appreciated the Federal Reserve is going to do what it takes to bring inflation under control quicker, which could then lead to economic normality quicker.
The Federal Reserve Chair, Jerome Powell, also said that the 0.75% increase was unusually large and he said he didn’t expect moves of this size to be “common”, though next month could see another 0.5% or 0.75% increase.
But it’s also important to keep in mind that, even with that rise, the S&P 500 is down 21% in 2022 and the NASDAQ 100 (NASDAQ: NDX) is down around 30% this year.
What I’m doing with my portfolio
I haven’t sold a single share during this share market plunge. Assuming I’m invested in good investments, I don’t think it makes sense to sell my ASX shares during this difficult period when prices are lower.
I’m doing the exact opposite of selling – I’m buying as much as my monthly budget allows. I think these lower prices will seem attractive over the long-term as good businesses continue to deliver underlying growth.
