How the Fed Is Driving the SMT Share Price Lower Ahead of Rate Hike

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Simon Mugo
Updated: 25 Apr 2022

Key points:

  • Scottish Mortgage shares have fallen 34.6% in 2022 and could be headed lower.
  • The fund’s decline is driven by the looming Fed rate hike expected next week.
  • James Anderson leaves the fund at the end of April as Tom Slater takes over.
  • However, the Fed will not keep hiking rates as the US economy suffers.

The Scottish Mortgage Investment Trust (LON: SMT) share price has fallen 34.56% in 2022 and seems to be heading for the 8 March 2022 low of 830p. So will SMT shares break the support level and head lower?

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Also read: The Best Financial Stocks To Buy Right Now.

The answer is yes, SMT shares can break below the 830p support zone and head lower if the Fed goes ahead and hikes interest rates by the expected 50 basis points next week on May 4, 2022.

The Fed rate hike has a much more significant impact on SMT shares mainly because the investment fund holds a basket of Us growth stocks that rely heavily on cheap borrowing to remain solvent.

Most growth and unprofitable tech stocks have to raise funds periodically to remain afloat, and some of the funds raised are in the form of debt that has to be repaid in future. High interest rates tend to raise the cost o borrowing for firms, especially those already operating at a loss.

Therefore, once the Fed hikes its base lending rate, commercial banks and other lenders will also have to raise their lending rates to keep up with the Fed. While higher interest rates are great for the banks and other lenders, they are bad for the borrowers who have to pay more interest on their loans.

Unlike many other analysts who believe the Fed will keep hiking rates for the rest of the year, I believe that the Fed will be forced to backtrack as the US and global economic situation worsens. The record-high inflation figures are here to say for much longer than we expected, primarily driven by the higher oil prices and the skyrocketing prices of most goods.

However, consumer spending is already showing signs of slowing down as the higher prices squeeze people’s incomes. In addition, the last thing the Fed wants is for many people to start defaulting on their mortgage payments, which will rise in tandem with the Fed’s rate hikes.

Furthermore, many small businesses also rely on cheap loans to survive, as do the high growth tech businesses held by SMT, which will start suffering if rates keep rising past a certain level. Hence, I believe the Fed will stop its rate hikes sooner rather than later. I don’t believe that the rate hikes will continue past this year, but the timeline could be shorter than that.

Investors are bracing for next week’s rate hike and further downside in the US markets led by the Nasdaq. Therefore, there might be more pain in store for SMT shareholders.

As James Anderson prepares to leave the fund at the end of April, Tom Slater, who has co-managed the fund since 2015, will be left in charge and will likely maintain the same investment philosophy that has guided the fund over the last 20 years.

SMT share price.

SMT share price 25-04-2022
Source: Tradingview

SMT shares have fallen 34.4% in 2022 and could be headed lower.

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