Make no mistake about it, this is still an “easy money” policy. #3 THE CHANGE IN INTEREST RATES IS ‘PRICED IN’ AND MEANINGLESS stock would be worth $10 tomorrow, they’d buy and sell until it was $10 today. Markets aren’t always perfectly priced, but this rise in interest rates has been anticipated for years. Again, in theory, higher interest rates drive down the price of bonds. This Financial markets are forward-looking... If everyone knew that a
leads some to claim that the day the Fed hikes rates, bonds will plummet. But do you really think there’s an investment manager sitting on a pile of bonds who hasn’t considered that rates are set to go up? #4 STOCKS PERFORM WELL WHEN INTEREST RATES RISE Many investors fear that rising rates will choke the life out of the stock market. The theory goes that higher interest rates reduce profits for companies because they pay more to borrow... Plus, other interest-paying assets will look more attractive
relative to stocks. In reality, the Fed typically raises interest rates when the economy looks healthy enough to withstand it. Right now, GDP is growing, employment is strong, and even wages are growing a little. In my experience, it’s the real economic factors pushing stocks up that outweigh the theoretical ones that could push stocks down. Looking at historical data, when interest rates rise from low levels, like from 0%- 4%, stocks tend to rise with interest rates. (It’s not as safe if rates start at a higher level... When rates rise from 5% and higher, that does tend to put pressure on stocks.) Talking heads in the media place more importance on interest rates than they should. Over the long term – spanning a business cycle that includes a recession and recovery – the Fed can certainly affect the path of the economy. But when the Fed announces a small change – it doesn’t mean much at all. Ignore it.
By permission Michael Ramirez and Creators Syndicate, Inc.
American Consequences | 47
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