interest rates are rising, people with money in stocks
all, there is an old Wall Street adage: "Three
steps and a stumble." It means watch out after the
Federal Reserve raises interest rates three times,
because stocks are likely to become losers.
adage comes from memories, and since the Federal Reserveís
rate increase Wednesday hit the magic "three
step" mark, you might think stocks would be
dropping. But the stock market remains close to an
of running in fear, investors seemed to like Fed Chair
Janet Yellenís message Wednesday ó that the Fed is
planning to raise rates gradually and no longer sees a
need to nurse the economy back to health from the Great
Recession. The Dow Jones industrial average immediately
gained 112 points ó definitely not the behavior of
investors spooked by "three steps and a
popular view among analysts is a growing economy will
keep generating corporate profits and allow stocks to
continue climbing modestly even though they have become
expensive after increasing over 245 percent since March
2009. And they say itís silly to compare the current
rising rate period to anything from the past because the
economy has been in a one-of-a-kind environment since
the Great Recession. For eight years, the Fed has kept
interest rates near zero to resuscitate an unusually
slow-growing economy. So three quarter-point rate hikes
since the end of 2015 are considered no big deal.
whether the current arguments hold true or not, recent
research also shows that fear of the Fed may not be in
Leuthold Group, known for its historical stock and bond
research, has just completed an analysis of interest
rate increases back to 1972 and found: "There are
no stumbles after a third rate hike." In fact
during the full year, investors in stocks were fine
after the third rate hike. By the second year, there was
often a moderate correction. But it wasnít a disaster.
Corrections typically involve relatively short downturns
of 10 to 19 percent in the stock market. By the third
year after the rate hike, the researchers found the
stock market making new highs again.
conclusion: "The hike alone is not likely to end
this bull market."
certainly seems to be the mindset in the market at the
moment. Some analysts for weeks have worried about the
stock market being expensive, but that hasnít caused
widespread concern. Instead, the market has reached one
new high after another as investors have bet that tax
cuts and deregulation would be embraced by the president
and Congress and light a flame under corporate profits.
comments added another level of confidence.
and bond "prices only move when something
unexpected happens," said Jay Love, U.S. director
of strategic research for Mercer Investment Consulting.
And Yellen spoke as though there would be no surprises.
confident that the Fed wonít become too aggressive and
snuff out the economy," said Jack Ablin, chief
investment officer for BMO Wealth Management.
other words, the analysts see no reason to dump stocks
now. Thatís especially true for people with years to
go until retirement as they simply put a little money
away with every paycheck into a 401(k) at work.
people in retirement or about to retire may have reason
now to take note ó especially if the unexpected does
occur and stocks and bonds start to take a hit.
rates rise there is additional pressure on stocks,"
Ablin said. So, weighing the combination of rising
interest rates and the fact that stocks have become
expensive lately, Ablin has recommended that his clients
hold about 5 percent less in the stock market than they
ordinarily would hold.
Nixon, chief investment officer of private wealth
management for Northern Trust, suggests people look at
their portfolios to make sure they arenít holding more
stocks than they intended. After the tremendous surge in
the stock market during the last eight years, she said,
people may have more U.S. stocks than they intended in a
diversified portfolio. With long-term bonds possibly
vulnerable too in rising interest rate environments, she
suggests having bonds that mature in three years or less
and enough cash on hand to cover living expenses during
on stocks in a rising interest rate environment can come
in various forms. While interest rates are modest now,
if they suddenly start snowballing it can make it more
expensive for companies to borrow money. So if a
business has to take on loans, borrowing costs can weigh
on the company and make it tougher to generate profits.
If it defers borrowing, it may have to cut back on
expansions or purchases from other businesses ó
conditions that, if widespread, can slow the economy.
often occur after the Fed has been raising interest
rates aggressively to slow overheated economies.
pressures on stocks during rising interest rate
environments can come from a change in investorsí
behaviors. During the last few years, ultralow interest
rates caused many seniors, who needed income from
investments, to move money into stocks even though they
typically would have avoided the risk of the stock
market. In the months ahead, as interest rates rise,
they will again be able to get better interest rates in
CDs and bonds. That can put pressure on bond substitutes
such as utility and telecommunications stocks that
people bought for their dividends, said Janet Dougherty,
a vice president for J.P. Morgan Private Bank.
however, Dougherty says: "Stay invested and donít
panic. The overall economic landscape is strong."