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.
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
An Interview with ETF.com David Kotok Article source: Alpha Think Tank – ETF.COM We are forwarding an interview done with ETF.com. We thank them for permission to share it with our readers. Dennis Hudachek of ETF.com was kind enough to spend considerable time in this interview and to capture the comments quite accurately….Read More
Category: Think Tank
NSA Helps Saudi Arabia Crush Dissent … Like It Helps Crush Dissent at Home Numerous high-level NSA whistleblowers say that NSA spying is about crushing dissent and blackmailing opponents … not stopping terrorism. In addition, the NSA is giving the raw data on American citizens living in the U.S. to Israel. That doesn’t seem to be a…Read More
Markets & Investing The chase for higher yield continues Investors are rushing into emerging markets looking for higher yields http://t.co/UVjHqBn6pf pic.twitter.com/m1gtsFHEAd — Wall Street Journal (@WSJ) July 23, 2014 Contrarian investing at its finest the more people say you can't buy bonds, the higher bond prices go. it's kind of awesome — J.C. Parets (@allstarcharts)…Read More
Category: Digital Media
> 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
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