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Should equity investors fear higher interest rates?

April 1, 2017 | Commentary

  • The Federal Reserve pursued a zero interest rate policy beginning immediately after the financial crisis in 2008 until December 2015, when it started inching up policy rates. Since then there have been three rate hikes, totaling 75 basis points, with the Fed guiding the market that it expects further hikes this year and next.
  • Traditional wisdom says that equity bull markets don’t die of old age but are usually killed off by an aggressive Federal Reserve raising policy interest rates. Since December 2015 the S&P 500 is up over 13%, running counter to that traditional thinking.
  • Given current low interest rates, modest private leverage and inflation, and healthy but not stretched labor and stock markets, the course of rate hikes over the next year or two may not be terribly restrictive to the economy, corporate earnings or stock prices.
  • It is in fact possible that these policy rate increases will help the consumer side of the economy as savers earn more interest income which then gets recycled as additional spending. This force is particularly important today with an increasing number of baby boomers retiring and depending on such income to support their consumption.
  • There are always many factors that stock market investors should watch carefully, but rising interest rates today doesn’t seem to be near the top of the worry list.

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