The market jumped out a little rough this morning. A bit o’ jitters about the new lofty heights, I suspect. Certainly, the good news on the US housing front could not be the reason.
- Groundbreaking for single-family homes climbed in October and permits for all future projects reached a six-year high to signal construction will add to U.S. economic growth in early 2015.
FYI, the number on the total starts for housing is 1.01 million. Not bad for an economy that has yet to hit all cylinders for growth. Yup, the reasons for the market climbing to new heights are becoming clearer all the time.
So, why did the market fall hard at the opening this morning? Aside from the obvious, which is the market is doing the “a bit forward, a bit less back thing,” it might be what the media is giving us this morning.
- U.S. stocks fell, after benchmark gauges climbed to records yesterday, as declines in technology and small-cap shares overshadowed a rally in retailers before the Federal Reserve releases minutes from its policy meeting.
The Fed again? Wow! The breathless media is like a dog with a bone. Gnaw, gnaw, gnaw, and never let it go.
- Wages and salaries climbed last quarter by the most since 2008 as a dwindling number of unemployed per job openings approached a tipping point.
Okay, so maybe I am being just a bit too hard on the media this morning and this morning only. It is true that as the employment situation improves, the Fed is getting closer to pulling the trigger on raising interest rates. As I asked yesterday, “What will the Fed do come June.” If the economic numbers keep coming in as they have been, we might not have to wait for June to find out.
So, in my mind, the issue for the market is not that the Fed will raise rates; rather it is when will it raise rates? The market is not afraid of higher rates. In fact, historically, the market has performed quite well in higher-interest environments, although this reality runs counter-intuitive to common thinking.
- If you sat down in an economics class today, you would probably learn that there is a negative relationship between interest rates and the stock market. In other words, when interest rates fall, the stock market rises and when interest rates rise, the stock market falls.
Yet, study after study has shown that when rates rise reasonably, the market fares quite well. Here is just one study to consider.
- J.P. Morgan Asset Management looked at the relationship between the 10-year Treasury yield and the Standard & Poor’s 500 index over the past 50 years. Instead of seeing a negative relationship between the two, they actually found there was a fairly strong, positive relationship in certain situations.
My point is the media reporting the market is going down because it (the market) is worried what the Fed might say about when it will raise interest rates is accurate but not true. Ultimately, the market will accept higher interest rates because reasonably higher rates are good for the economy.
True, credit is more expensive, but that is good because it puts the brakes on an overheating economy, which we are now beginning to see. Higher rates are also good because folks are encouraged to save more money with higher rates (banks have more money to lend). Seniors have more money to spend, as interest rates affect them most directly. Don’t forget, seniors are the largest segment of the US population right now.
As obscure as it might be right now, the market likes higher interest rates because it signals an economy in full gear, as I just mentioned a moment ago. Oh, and there is another reason a higher interest-rate environment is good for the economy – banks make more money to lend, which is what they have been forced back into doing by the financial regulations.
- ICAP (IAP.L) shares sank almost 8 percent on Wednesday after the world’s largest interdealer broker reported a 38 percent fall in first-half profit and gave a cautious outlook for the rest of the year.
Yup, the above is all about banks trading and banks being forced out of the trading business.
- Interdealer brokering revenues have plunged as banks pull back from risky trading activities to comply with new rules brought in after the financial crisis.
And banks getting out of the derivatives trading business means they have to make money somewhere and that would be lending. Not trading their dough means banks have more money available for lending and when that happens, banks make more money lending, especially if interest rates are higher. When they make more money lending, and not losing it on derivatives, banks have more money to lend. Quite the circle, but still good, yes?
Trade in the day; invest in your life …
