Saturday, November 21, 2015

Stock Market: How Wall Street Stopped Worrying And Came To Love The Interest Rate Hike

(Drivebycuriosity) - Last week the US stock market gained about 3%. Most of the gains came after the Federal Reserve had published her Fed Minutes: The protocol of the latest Fed meeting declared that the "conditions needed to trigger the first interest rate hike in nearly a decade could "well be met" by their next meeting in December" (abcnews). It seems that Wall Street stopped worrying and came to love the interest rate hike.

I think the announcement triggered a stock market rally:

- The interest rate move is already priced into the stock prices. Speculations on a possible rate hike had the stock market paralyzed this year and the S&P 500, the gauge of the US stock market, stayed almost  unchanged year-to-date. Many funds and other traders with a short time horizon have sold stocks or are sitting on the sidelines because of the continuous talk about a possible interest rate raise.

- The rate hike will be modest, maybe just plus 0.25 percent points. So even if the Fed hikes the interest rates will stay abnormal low. History shows that such small moves don´t slow the economy.

- The Fed move could be seen as a sign of economic strength and that the Fed sets trust into the economic upswing. This commitment could soothe the fears and calm the markets. Returning confidence should attract buyers.

-  The step should reduce the uncertainty and create some clarity - at least for the moment. Funds and other traders who avoided stocks because of the interest rate hike talk could come back.

It is highly likely that last week´s gains are the begin of a year-end rally which could drive stock prices (S&P 500) north of 2, 200 by end of the year.


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