Watching the Tape: A random walk through recent economic, market and business headlines, December 11, 2015
“Judge a man by his questions rather than by his answers.” Voltaire
Don’t Fight the Fed Edition
If Voltaire is right, we may judge the entire financial world in the same light these days, because literally everybody is asking the same questions.
Will the Fed finally raise interest rates next week?
Probably. Oddsmakers give a 75% probability the Fed will raise rates next week. The announcement is expected Wednesday afternoon.
Trying to calculate the outcome of higher rates, we built a list of everybody who will be impacted by the Fed’s decision on Wednesday.
Before long the list started sounding like Dr. Seuss.
Those who use banks, and those who trade Francs.
Those who have debts, and those who make bets.
Those who want income, and those who buy growth some…
(We could call it “Horton Goes to Wharton”?)
U.S. interest rates haven’t risen in 9 years. If interest rates are allowed to return to normal levels everybody will be affected. Which leads to the next question.
What is the normal level for interest rates?
Quoting Morticia Addams of the Addams Family:
“Normal is an illusion. What is normal for the spider is chaos for the fly.”
So exactly what is “normal” for interest rates? We borrowed a bar chart, below, from Morningstar. This chart goes back to 1926, and shows interest rate highs and lows for the past 90 years. The black line marks where we are now. The white line indicates “average” interest rates.
Comment: Normal depends on inflation, but according to “The 6/50 Rule”, interest rates have moved at least 50 Basis Points (1/2%) in 98% of all rolling six month periods since 1968. So “normal” could mean interest rates will rise ½ percent by mid-summer.
Will the stock market go down if interest rates go up?”
We borrowed the table below from the September issue of Financial Advisor magazine. (September was the last time economists said there was a 75% chance the Fed would increase rates, which didn’t happen.) This table shows how well the S & P 500 performed in years of rising interest rates.
Comment: The median return of the S & P 500 during periods of rising rates was around 12%.
Bring on those higher interest rates! As Morticia Addams once said,
“Life is not all lovely thorns and singing vultures.”
Diversification will smooth the ride for investors. Remembering the words of Dr. Seuss,
“Step with care and great tact, and remember that Life’s a Great Balancing Act.”