Interest Rate Roulette – Is There a Winner?

Mixed signals from the Fed once again have the stock market chasing its own tail. Articles are written on a daily basis highlighting the negative ramifications created by increasing interest rates, or even their threat and the stock market reacts “accordingly.” But a great deal of the economic gospel being preached is completely out of touch with reality. Nevertheless, the logic of the arguments seem to make sense and feel entirely credible. For example, it makes sense that increased interest rates could result in; reduced home values, reduced stock market prices, and reduced emerging market stock prices. It seems logical that home values would drop as interest rates and therefore mortgage rates increase. Stock market prices are also believed to be dragged down as corporate borrowing costs go up and profit margins go down. And finally, emerging market stocks, which are believed to be the most sensitive to increases in the interest rate, should be the first and most susceptible to a downturn. But history actually shows the opposite of these perceptions to be true.

Research conducted by Daily Wealth clearly indicates that results are diametrically opposed to what is typically anticipated. Tightening efforts in the late 60’s allowed housing values to increase at a greater rate than easing efforts:

U.S. House Prices 6 Months 1 Year 2 Years
Start of Tightening 3.7% 6.7% 13.3%
Start of Easing 1.8% 4.7% 8.9%

 

Since 1950, the stock market has responded quite positively, when the Fed initiated “tightening” policies by raising interest rates. Cuts to the interest rate, on the other hand, have not fared as well for the stock market:

 

Stock Returns 3 Months 6 Months 1 Year
Start of Tightening 6.3% 8.8% 9.2%
Start of Easing 1.7% 3.4% 8.0%

 

Additionally, there has been four “rising rate” cycles in the past thirty years and emerging market stocks did better during the tightening phase in three of the four cycles.

The main purpose of “easing” is to loosen the purse strings and temperament of the average investor. But it is most useful 1) as a temporary relief (rather than a lifestyle), and 2) as a way to get back to a more “normal” market condition. The overuse of ongoing “easing” policies since 2006, has apparently worn out its welcome, possibly to the point that it’s also outworn its usefulness. And the current “tightening” provided by such a small interest rate percentage, as applied back in December, have made it practically a non-existent event. It’s probably an effort that could have had a greater effect, had it started, increased regularly and made inroads a couple of years earlier, before the market got lulled into a vacillating  stupor.

Contrary to popular belief, gold too performs very well (not initially) following an interest rate increase. Gold’s increased valuation since December, when interest rates were increased, is just another case and point. But a great general rule to follow is “treat any drop in the price of gold as an unexpected buying opportunity.”

Please follow and like us:

You may also like...

Add a Comment

Your email address will not be published. Required fields are marked *