Many people assume that rising interest rates must be a bad sign for stocks. It’s not nearly that simple! Tom and Brendan discuss this on the weekly Mullooly Asset Management podcast.
A recent article by Barry Ritholtz (which you can find here: http://www.ritholtz.com/blog/2014/07/rising-rates-unliklely-to-kill-this-bull-market/) covered the effect rising rates have on the stock market. Its focus was the likelihood of the current bull market being stopped by rising interest rates.
The old rule is that when the Federal Reserve is cutting rates, you want to own stocks. When the Federal Reserve is raising rates, get out of their way (and the market). With quantitative easing being tapered, should investors be worried about interest rates affecting the stock market soon? Probably not.
The first thing to remember is that the stock market doesn’t always do what people expect it to.
Another valid point raised by Ritholtz is that when inflation is high, and rates are going up from those already elevated levels, we’ve generally seen a negative impact on stocks. However, when inflation is low and rates increase from those low levels, the impact on stocks is generally positive.
Currently, we’re experiencing low inflation and low interest rates. If history holds true, the first few rounds of rate increases should not harm the markets overall. A few sectors may underperform and others may outperform, but rising rates are a sign the economy is growing. That’s good for stocks!
Our opinion at Mullooly Asset Management is that the first two rounds of quantitative easing were essentially triage for the banks. The focus was to keep the banks open and running. That meant economic growth, lending, and the individual became secondary concerns of the Fed. The third round of quantitative easing was meant to spur the economic growth. Quantitative easing takes a long time to filter into the economy and we may just be starting to see its effects now while we near its end.
So are rising interest rates always bad for stocks? Not really. As always we’ll continue to monitor the charts and let them dictate our gameplan.