|Dow||+228.11 to 17,977.42|
|S&P 500||+27.79 to 2,081.19|
|Nasdaq||+57.75 to 4,929.51|
|10-YR Yield||-0.01 to 2.098%|
|Gold||+$1.00 to $1,153.60|
|Crude Oil||-$1.02 to $43.82|
Markets are volatile — any hint of a rate increase sends shudders through the investment community and sends stocks tumbling. Every good report on the economy, such as those in regards to jobs, is met by speculation of an imminent move by the Federal Reserve to hike rates and by a bashing of equity markets.
Cases in point: On March 6, the Labor Department reported that the economy added 295,000 jobs in February, smashing expectations and bringing unemployment to the lowest level since 2008 … The Dow tumbles 280 points. Then last Tuesday, the Labor Department reported that job openings were the highest in 14 years … Dow tumbles 332 points. …
|“Attention will again be on Fed Chair Janet Yellen’s press conference at 2:30 p.m. Wednesday.”|
Today’s rally illustrates the situation perfectly — after the knee-jerk downward moves, markets bounce back, often in a big way.
Some are calling the selloffs “Patient Panic” — fear that the Fed will drop the word “patient” from its vocabulary and suddenly rise up and hike rates. So attention will again be on Fed Chair Janet Yellen’s press conference at 2:30 p.m. Wednesday after the Federal Open Market Committee’s (FOMC) two-day meeting.
Should we be so worried? Not at all. Certainly, interest rates will eventually edge up, whether in June or later in the year, and there will be wild swings in the market. But any rate rise will be slow, steady and carefully considered. So forget those knee-jerk selloff reactions … those Patient Panics and Interest-Rate Tantrums. We should greet this as good news. It means the economy will continue to improve, that things are getting … better!
The markets up to now have enjoyed the low interest rates and Fed liquidity-heightening bond-purchasing programs. But, from history and from analysis of the current situation, the good times don’t have to end with a tick up in rates.
We went back and looked at instances in the past couple of decades when the Fed did start to hike rates. And we studied the corresponding performance in equities. What we see in the chart below is whenever the Federal Funds rate moved up, stock prices scored gains as well.
That’s not to say it will be a clean, nonstop rise in shares. This is not a totally “normal” time: The dollar is rising to long-term highs and energy prices have fallen and the commodity’s near-term future is uncertain. Plus concerns remain about corporate profits in the first and second quarters (outlooks have been lowered, though, meaning we might have a lot of “beats” results). But the probability of a major, long-term correction is low.
And, according to some further research, the probability of the U.S. dipping into recession can also be evaluated by looking at history.
Without getting too bogged down in details, by examining credit spreads and an inversion in the yield curve — where short-term rates jump vs. longer-term variants — we are able to calculate the probability of a recession. Right now, the probability chart is indicated at a relatively low 40 percent.
So all of the research and the numbers — and a calm, orderly look at the current environment — tell us that the bull is still healthy, and that any dips will provide buying opportunities. But, with the previously mentioned concerns, it means that not every stock will rise, and picking winning stocks will not be as easy as at the height of the bull market. Careful study of a particular company’s fundamentals will be more important than ever but, if done right, can lead to a successful year, even with a series of small Fed rate hikes.
What about you? Will a Fed rate hike force you out of the market? Will you panic? Or will you hold firm, and even buy on any dips. How close will you follow a Yellen press conference? Jump on over to the website and let me, and your fellow readers, know what you’re thinking.
|Our Readers Respond|
Mike Larson is out, but he closely watches the comments we receive from our readers and will respond when he returns. So click here to comment on interest rates and how you and/or the market will react to a hike or to comment on any other matter.
|Other Developments of the Day|
One market that continues to surge higher is the DAX, the German stock index. Stocks in that country roared to record highs this morning as investors focused on the expected increase in corporate profits likely to come from the lower value of the euro. The DAX surpassed 12,000 for the first time ever, boosted also by the European Central Bank’s QE program.
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He’s back: Russian President Vladimir Putin appeared in public for the first time in 11 days, quelling speculation about his health. He met with the president of Kyrgyzstan in St. Petersburg. Russian TV showed brief, silent footage of the meeting. Kyrgyzstan President Almazbek Atambayev tweeted after the meeting that Putin “just took me for a little drive — he was at the wheel — nearby here, and I can confirm that he’s in excellent form.”
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Editor’s note: To learn more about Mandeep’s Top Stocks Under $10 service, click here.