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The Federal Reserve is almost certainly going to raise interest rates this week, and that means investors will closely watch the stock market's reaction. While we don't expect a stock market crash to happen, investors should know how to protect their money in case the market drops...
Overwhelming odds suggest the Fed will raise rates at the June 13-14 FOMC meeting, with 99.6% of the market expecting an interest rate hike, according to CME Group's FedWatch Tool.
However, if the Fed doesn't raise rates, it could cause investors to panic as the Fed didn't do what was expected. Stock prices could fall as investors search for safer investments.
And if things don't go as planned, it's always prudent to have portfolio protection...
Unexpected Events Can Create a Stock Market Crash
Investors weren't expecting Britain to leave the European Union (EU). So when the results showed Britain voted to leave the EU on June 24, 2016, the Dow Jones Industrial Average plummeted 590.29 points to an intraday low.
And it's not just foreign events that cause stock prices to suddenly drop...
After the Fed raised rates on Dec. 14, 2016, from 0.25%-0.5% to 0.5%-0.75%, the Dow fell 128 points to an intraday low. But it wasn't this specific rate hike that caught investors off guard.
What caused the sell-off back in December was the Fed announcing its expectations to raise rates three times in 2017, two or three times in 2018, and three times in 2019.
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After only raising rates twice between 2006 and 2016, investors were not prepared for the aggressiveness.
Now, the markets are expecting the Fed to be more aggressive because economic data is looking more positive. The unemployment rate was 4.3% in May 2017, the lowest it has been since May 2001. Also, investors are optimistic that President Donald Trump's tax cuts and his $1 trillion infrastructure plan will bolster the economy.
While these previous drops weren't stock market crashes, they show that investors react negatively to the Fed's meddling or unexpected events. While we don't expect it to happen, a sudden sell-off could spiral into a stock market downturn.
And if that happens, investors can protect their portfolios with these two investments...