Apparently, it doesn’t take much to send me over the edge. No, not the edge of sanity, although I have looked into the precipice a time or two in my life; rather, as I have mentioned before, I can go over the edge of boredom with the market. Yup, all this stupidity about the Fed raising rates makes me want to take a nap. Instead, I have to take the time to set the record straight, at least as straight as I see it.
The problem here folks (and you know what is coming) is two-fold. The first fold is the breathless media has its bone and it is not letting go – raising rates is bad.
- Interest rate increases by the Fed, when they occur, should preserve stock market P/E ratios, not impair them…unless these are not successful in controlling inflation or drive us back into deflation.
Not only is raising interest rates not bad for P/E ratios, which, by the way, are a key metric for market investors, they are good for the market.
- Northern Trust, a Chicago-based firm that manages more than $900 billion in assets, measured stock returns from six months before to six months after the Fed’s first announcement of a rate rise. In four of the last five periods surrounding such an announcement, the S&P 500 generated positive returns, with the exception caused by the stock-market crash of 1987.
I know it seems counterintuitive to think of higher interest rates as positive, but that is only because the breathless media and all of it minions keep telling us this is so. The fact of the matter is the market performs better when interest rates rise because it means one thing – economies are doing so well they are generating inflation.
- To understand why stocks can thrive at such times, think of low interest rates as medicine for the economy: You take it away only when the patient is healthy.
Sure, inflation means higher prices for food, housing, and fuel, but it also means higher wages, which, by US Federal Reserve reckoning, is the biggest contributor to inflation.
Here is another consideration for your thinking pleasure. The current interest rate environment is abnormal, and has been for over five years. Economies and the market have flourished and will continue to flourish in a normal interest-rate environment.
- For almost 50 years, (with limited exceptions, about 2% of the weeks), there has not been a 6-month period during which interest rates did not change at least 50 basis points.
In fact, interest rates going up and going down is normal. It is the mechanism by which the Federal Reserve tweaks the US economy and it is the mechanism that is supposed to keep an economy from overheating when it gets going. If the Fed does it job well, then things go right for some time. If they don’t … well, go back to the late 70s to see what happens.
- The reality is that interest rates are much more volatile than most investors realize. As history demonstrates, almost half of the time, interest rates change by more than 1.5% (and over 25% in percentage terms) over all 6-month periods.
The second fold of the current market problem boring me is the fear factor – because the breathless media and its talking head circuit are drumming up this fear, a snowball effect happens. As the snowball rolls downhill, it pulls in more snow and gets bigger, which then makes it roll faster. Witness today’s market. What has appreciably changed regarding the Fed and it stance on raising rates since yesterday? That is right – zippo, nada, not a darn thing.
But what did change is the economic data – the other bone the breathless media often latches onto and just will not let go.
- Sales at wholesalers fell 3.1 percent in January, the largest drop since March 2009, after slipping 0.9 percent in December. At January’s sales pace it would take 1.27 months to clear shelves, the most since July 2009, up from 1.22 months in December.
Yes, pick the slowest economic month of the year when over half the country is buried in snow and freezing temperatures and then extrapolate from that a number that sounds really bad and then take that and make it news. Fortunately, there are voices of reason out there in the land of 24 hours of noise.
- The cooling in activity is seen as temporary and a consumer spending-driven rebound is anticipated in the second quarter. Harsh weather, slower global demand and the now-settled labor dispute at the country’s West Coast ports have constrained economic activity early in 2015.
And there you have it, my attempt to make my desire to take a nap go away. Did it work? I don’t know quite yet. The market is still boring as it drives itself deeper into its hole. Can someone please change the channel?
Trade in the day; invest in your life …
