No matter what the market ends up doing today, it is clear after the reversal this morning, it still sees the boogeyman under the bed; it still worries that the Fed raising interest rates is bad for the market, and it completely ignores the reason the Fed will raise rates – a steadily improving economy.
- Stock futures extended losses on Friday after a blowout nonfarm payrolls report for May heralded fears the Federal Reserve will feel more confident raising rates sooner than later.
The market’s behavior relative to the Fed is about as irrational as I have ever seen it, and it is all attributable to the breathless media giving soap boxes to the pundits and analysts who, for whatever reason, are preaching the gospel that higher rates are bad for the market. Oh wait! I do know the reason.
- The end of easy money: Raising interest rates is like removing the punch bowl from the stock market party. One of the drivers of the bull market has been the Fed’s policy of near zero rates since 2008.
The above is the standard line, and it is true that cheap money has helped consumers and businesses, which has contributed to the six-year bull market, but the question to ask is this: Will the market suffer under higher rates?
- Investors are right to be concerned, but they shouldn’t panic. The market has had a long time to get ready for a rate increase. And history shows that stocks can rise considerably during periods when the Fed is tightening credit.
Or so says myriad studies of the rising rates phenomenon. Here are three current ones.
- Ben Carlson, a portfolio manager for the endowment fund at the Van Andel Institute, looked at the 14 periods during which the Fed was boosting short-term interest rates since the S&P 500 index was launched in 1957. The average annual return for the S&P 500 during all 14 periods was 9.6%, including dividends, almost equal to the 10.1% average annual return for the index from 1958.
- 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.
- J.P. Morgan Asset Management recently looked at how stocks performed immediately after interest-rate boosts over the past 25 years. On average, when the Fed raised interest rates by a quarter of a percentage point—a common move—stocks fell slightly in the following week, but returns were positive after one month and three months, the firm found.
There are more, trust me. There simply is no validity to the argument that the stock market will fall apart when the Fed does hike rates, well, no validity other than the market is highly irrational when it comes to this idea. Thank you breathless media. Your need to give dire “news” more of a platform than boring reality is why we have a market falling all over itself when it comes to the Fed raising rates.
- China stocks reached new highs after a week of roller-coaster action. Shanghai added 1 percent to clear the 5,000 barrier for the first time since early 2008.
So much for the fear that China’s market was headed for its “day of reckoning.”
- Payrolls climbed in May by the most in five months and worker pay accelerated, showing companies were upbeat about the U.S. economy’s prospects after an early-year slump.
And how does the above square with the idea that the market is headed for a big fall when the Fed raises rates? One sure sign companies are making money is that they are giving raises to their employees. They do this to keep them, to attract them, or simply to share in the bounty of success. No matter the reason, the fact is a tightening labor market underlies all the reasons employers give raises, and a tightening labor market only happens when employers need workers because they are busy enough to need more workers.
How simple is this folks?
- There is a good chance that average U.S. gas prices will drop soon due to stabilizing crude oil costs and as refineries complete seasonal maintenance, which would result in the cheapest summertime gas prices since 2009.
The above comes from Triple A, and the suggestion is that cheaper gas prices will inspire more folks to travel by car this summer, and the implicit suggestion with that is that they will spend more money as they vacation.
Once again, it appears we have the same situation unfolding for the market – bad winter economic data, spring turnaround, summer lull, and fall revealing good economic numbers to set up a late-year market rally.
Oh wait! The Fed is now going to raise rates in September, or “they” say.
Trade in the day; invest in your life …
