Stock Market: Why A September Interest Rate Hike Could Start A New Rally

(Drivebycuriosity) - Last week the US stock market (S&P 500) dropped 3.4% and lost 6.7% year-to-date. Stocks have been falling because of  China´s cooling economy and speculation about a Fed interest rate hike.

I think the Fed will raise interest rates this month (I explained here why driveby).  I also believe that the interest hike will start a new rally on the stock market.

Here is why:

- The interest rate move is already priced into the stock prices. 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 raises 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.

 I suppose that the soft patch of the world economy ends soon and that positive news from the US, Chinese & European economy will justify the Fed´s move and support the confidence and enhance so the rally.

The talks about the expected interest rate hike had held back stocks and suppressed their prices cumulatively for months. I think it is highly likely that the stock market snaps back like a bow string when it its freed and catapults stock prices to new highs. I expect a relief rally which could drive stock prices (S&P 500) north of 2, 200 by end of the year.

Enjoy.