Rising Rates Unliklely to Kill This Bull Market

One of the oldest rules on Wall Street is, don’t fight the Fed. When the Federal Reserve is cutting rates, you want to be long equities, and when it is tightening, get out of the way. This has been a cause for concern since the Fed began talking of tapering its program of quantitative easing and ending its zero interest-rate policy.

But the knee-jerk response to an over-simplified rule of thumb might be wrong. When we look at the actual data — what happens to stocks when rates rise — we find a very different set of results than this heuristic suggests. Before I get to the numbers let’s look at both the positive and negative sides of increasing rates.

It is understandable that there is concern with a rising-rate environment. Often, higher rates signal an overheating economy, higher costs of credit to purchase goods and services and a potential profit squeeze as operating expenses rise. When the Fed is in its inflation-fighting mode, too much tightening will cause a recession.

However, there are also positives to increasing interest rates. Rates are merely the price of capital. Higher demand for capital means the economy is strengthening, as consumers borrow to spend on goods and to buy homes and companies seek to hire and do more investment spending. Higher rates also mean the risk of deflation is decreasing. Lastly, it reflects a normalization of Fed interventions, which today would suggest that the credit crisis is behind us.

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Category: Federal Reserve, Fixed Income/Interest Rates, Investing, Markets

10 Monday AM Reads

My morning  train reads (continues here): • 10 things you should know about Ace Greenberg (Reformed Broker) • China H-Shares Enter Bull Market on Stimulus Wagers (Bloomberg) • Why Buy-and-hold investing is impossible (MarketWatch) but see So you’re the world’s greatest trader? Taxes will fix that. (Washington Post) • Benchmark Blues (Streetwise Professor) continues here  …Read More

Category: Financial Press

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Check out this fascinating and freewheeling interview with former SEC Chairman Arthur Levitt:

 

Category: Regulation, Video

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Category: Think Tank

Margin Regulation and Volatility

Category: Think Tank

NSA Helps Crush Dissent at Home and Abroad

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Category: Think Tank, War/Defense

Morgan Freeman as LeBron James doing Redemption

This was the funniest thing I saw all week:   LeBron James Redemption (Frank Caliendo as Morgan Freeman  

Category: Humor, Sports, Weekend

Tweets of the Week 7.25.14

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Category: Digital Media

What if You Were the World’s Greatest Trader® ?

>   My Sunday Washington Post business section column is out. This morning, we look at the impact of taxes on personal trading accounts. The print version used the headline A harsh reality for all you stellar active traders; the online version is So you’re the world’s greatest trader? Taxes will fix that. The bottom line…Read More

Category: Investing, Taxes and Policy

10 Sunday Reads

My Sunday morning readings: • An Investing Primer For Millennials (Patrick O’Shaughnessy) • The Typical Household, Now Worth a Third Less (NY Times) see also Why voters aren’t angrier about economic inequality (NY Times) • Miller: Homebuying Gets a Housecleaning (BV) • Wealthfront Tax Loss Harvesting  – How NOT to Calculate Tax Alpha (Kitces) see…Read More

Category: Financial Press