Do the fed rate hikes mean death to the stock market?
The Taper has begun. In case you’re not the type to read or watch the financial news, late last year the Federal Reserve began tapering off its stimulus program. More properly, they slowed the rate of stimulus…they didn’t actually remove any. Nevertheless this was big news.
When the Fed first indicated it might do this earlier last year, the stock market didn’t take too kindly to it. That’s because the stock market doesn’t like uncertainty and they weren’t really certain what the Fed might do or to what extent it might do it. This time when the tapering began, the market actually rallied. They now knew what the Fed was going to do and when it was going to do it. Plus the spin went like this: If the Fed felt comfortable easing economic stimulus, the economy must really be getting better.
Yet regardless of what has happened so far, there are a number of people who think that the next big move in the markets is down, specifically because of the Fed easing off the gas pedal. Their logic: As the Fed eases up and eventually ends the stimulus program, interest rates will rise. When this happens fewer houses will be sold, consumers will have less disposable income to shop. In addition, business borrowing costs would go up which would stifle their ability to expand.
To some extent this is true. But if the economy was getting better at the same time, wouldn’t that mean more jobs, job security, and meaningful raises? Wouldn’t that help people buy homes, furnish them, take a vacation, and buy a new car? And isn’t that then good for the businesses that cater to them?
See, there are two sides to this story. Frankly, I’m not sure which one will win out. So let’s journey back into history and see what has happened in the past. You see this won’t exactly be the first time the Federal Reserve raised interest rates.
They did so back in 1977, and the market went up over 40% in just over three years.
They did it in 1986, and the market went up 34% in the next 8 months.
They did it in 1988 and the market was up over 40% again; this time it took only a little longer than two years.
They did it in 1999 and it was up over 10% in just nine months.
They did it in 2004 and the market was up 37% across a 40-month period.
I left one out: 1994. That year the Feds started raising rates in February and the market was down for the rest of the year…but the losses were under two-percent.
So while the Federal Reserve removing stimulus and raising interest rates does dampen the economy, they do it because the economy needs some dampening. And that seems like an okay place to be…especially coming from where we’ve been.
That’s not to say that everything will be rosy; all of those up markets did eventually come to an end. But it is nice to know that tapering doesn’t mean that we are being pushed off a cliff.
This article was published under the title "Tapering of Stimulus not all bad"
in the Wichita Falls Times Record News on March 23, 2014.