The Nikkei Index (Japanese stock market) dropped 7.3% on May 22 (the S&P 500 was down that day too, but not nearly as much). This rattled global investors who had been enjoying a big run up in the Nikkei (the U.S. market enjoyed similar returns). One reason for the drop is investor fears over a potential rise in interest rates.
A more important thing to consider is investor flight to high-yielding investments such as dividend payers and preferred stocks. If interest rates do go up, that will drive down yields among these sectors causing a sell-off. Or will it?
This happened before in 1994, when the Fed raised interest rates five times. In that rising rate environment, high-yield investments such as REITs, consumer staple and utility stocks really took a hit. But, the market as a whole finished up 1.3% for the year.
This is why you should never engage market timing in to capture unrealistic investment returns: Returns that could easily be wiped out in a day or two. Instead, you should maintain a well-diversified portfolio with allocations across multiple sectors, asset classes and global regions.
