The Fed Sends Stocks Tumbling Again
I’m getting a sense of déjà vu in the stock market.
In early August, the Federal Reserve (the Fed) kept interest rates steady.
However, the Fed chairman, Kevin Warsh, raised the possibility of hiking rates in the September meeting.
Stocks crashed in early August on the news.
Well, the Fed just met, and investors’ fears were realized.
The Fed decided to raise the federal funds rate by 25 bps, which is the first interest rate hike in 3 years.
The Fed also announced it will probably raise interest rates again before the year is over.
The stock market hated the news, with the Dow dropping over 900 points following the Fed’s decision.
The interest rate hike wasn’t a surprise.
Since early August, the Dow is down over 3,000 points.
And interest rates are climbing.
Last week, the yield on the 10-year Treasury hit 5% for the first time since 2007!
How concerned should we be?
Well, there’s good news and bad news.
The bad news is inflation is rearing its ugly head again.
The Fed wants to keep inflation near 2% per year, but it hit over 4% in May and has been consistently higher than 3% the last few months.
Higher energy costs from fighting in the Middle East are working their way through the economy and raising prices.
But there’s good news as well.
Our economy added 162,000 jobs in August, which is a reversal from the sluggish job growth we’ve seen since 2025.
Higher interest rates slow down the economy, so a recovering job market means the Fed can focus more on fighting inflation.
Since interest rates are rising, what stocks should you be looking at?
Volatility is rising in the stock market because of interest rates.
It can be scary for some investors, but higher volatility is great news for Cboe Global Markets (ticker: CBOE), the largest options exchange provider.
Cboe stands for the Chicago Board Options Exchange.
Cboe’s options markets process over 23 million options contracts each day.
And as volatility rises, investors are looking to options to reduce their risk or make a quick buck.
Cboe is also incredibly profitable.
Its return on equity (ROE) of 26.7% is almost double the industry average and is currently at an all-time high for the company.
Cboe’s stock price is also trading at a major discount.
Cboe’s price-to-earnings (P/E) ratio of 20x is near an all-time low for the stock.
Higher oil prices are forcing the Fed to push up interest rates in an attempt to keep inflation in check.
And higher oil prices are excellent news for energy giant Exxon (ticker: XOM).
Exxon is one of the world’s largest oil drillers, generating over $30 billion in profit each year.
Now, Exxon’s P/E ratio is on the higher end at 21x.
Most oil and gas companies have P/E ratios around 15x.
However, investors are willing to pay a bit more because of interest rates.
Exxon has more than 10x as many assets as debt, and its debt-to-equity ratio is less than half the ratio of its peers.
Why does it matter?
Higher interest rates won’t hurt Exxon’s bottom line because it barely has any debt.
However, its competitors (with cheaper P/E ratios) will be paying more in interest expenses to the bank every year if interest rates continue to climb.
Last up is Bank of America (ticker: BAC), one of the largest banks in the world.
Banks make money from higher interest rates because they lend more money at floating rates.
However, banks tend to borrow money at fixed rates.
Thus, the spread, called net interest income, rises when interest rates rise.
Bank of America is the perfect stock for higher interest rates because of its size and interest rate exposure.
According to its latest quarterly report, Bank of America would make an extra billion dollars for every 100 basis point increase in interest rates.
So, higher interest rates make Bank of America a lot more money.
Its stock price is up more than 20% over the past 6 months, largely from changing interest rate forecasts.
But Bank of America’s stock price isn’t overpriced.
Its current P/E ratio of 13.4x is a little higher than the ratio for other banks, but is right around its historical average.
What do you think the Fed is going to do with interest rates for the rest of 2026?
Coach Parker
Category: Stocks
