Tuesday, March 14, 2017

Stock Market: Relax, The Fed Won`t Kill The Rally

(Drivebycuriosity) - The stock market is in a wait-and-see mode. It seems that everybody is waiting for the Fed decision tomorrow. Bond & stock markets expect a interest rate hike of quarter percent point, the third after the 2008 recession.

I think this raise won´t stop the stock market rally. The interest rates will still be abnormal low and the Fed is just responding to the strong job market and other positive trends in the economy. History shows that stock prices & interest rates can happily rise together: The Bank of America Merrill Lynch (finance) notices that “the 1950s was a period of higher stock prices and higher US interest rates. The US 10-year yield bottomed near 1.5% in late 1945 and the S&P 500 remained firmly within its secular bull market until yields moved to 5-6% in the mid 1960s. The S&P 500 rallied 460% over this period.”

I assume we can have a similar development this year. Companies will benefit from a growing global economy and will sell more products which will translate into higher profits.  Helpful are the ongoing efficiency gains (due to learning & technological advance) and the growth of the emerging markets (China, India & Co). Therefore the profit gains will overcompensate the negative effect of the rising interest rates and the stock market rally will continue.

If Trump doesn`t start a trade war with China he might give the economy an additional boost by reducing taxes & regulation and infrastructure investments. This would also lift the interest rates on the bond market (the raise had already started). Then the expected interest rate hike - and those which should come in the course of the year - would just follow the climbing market rates. As long the economy doesn`t overheat - and inflation doesn´t break out - the Fed policy will be no problem for the stock market. Relax.

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