Rising Interest Rates Likely Won’t Kill This Stock Market


For the weekend read, Gary Alexander, Senior Writer at Navellier & Associates, offers the following comment:

Let’s review the last four weeks – the twilight of summer: At 10 a.m. EST on Friday, August 26, once-mild-mannered Fed Chairman Jerome Powell gave an 8-minute talk at a beautiful beach resort in the Wyoming and knocked the Dow over 1,000 points that day and another 1,000 points the next week.

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Q2 2022 Hedge Fund Letters, Talks & More

Jim Roppel says the bear market is ‘aging’ and ‘opportunity may strike soon’

BearUS equities remain in a bear market, as evidenced by the decline of more than 20% since the start of the year. As a result, it has become much more difficult to profit from trades this year than last year, but it is not impossible. At MarketWatch’s recent Best New Ideas Money Festival, hedge fund manager Jim Roppel shared his strategies Read More

The market struggled to regain 1,000 points, but when a monthly gain of 0.1% in the consumer price index was announced on Tuesday, September 13, the Dow Jones fell another 1,200 points this that day and 4.13% for the week in a case of one step forward, two steps back, and it all seems based on the fear of two more rate increases.

I rarely see analysts look back on the last few times we’ve seen multiple rate increases, so let’s take a closer look at the 2004-06 and 2015-18 rate hike cycles, to get an idea of ​​how little fear we have of the Fed.

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  • Beginning June 30, 2004, the Fed raised interest rates 17 times in two years, by 0.25% at each FOMC meeting, and yet the stock market continued to rise. So has gold, despite the warning we keep hearing that “high interest rates are bad for gold”. The only market these rate hikes killed was real estate., and which led to the financial crisis of 2008, based on some perverse mortgage derivatives. Here is a chart listing the average (12 month) federal funds rate from 2003 to 2007, compared to market reaction – positive each year.

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From its low of 789 in March 2003, the S&P 500 nearly doubled to hit 1,576 in October 2007. Amid this bull run, the federal funds rate rose from 1% on June 29, 2004 to a high of 5, 25% on June 29. , 2006.

  • After the financial debacle of 2008-2009, the federal funds rate was lowered to “zero to 0.25%” for seven full years, from December 16, 2008 to December 15, 2015. If retirees tried to live on 1,000,000 $ for a year at the bank CD rate, they would collect maybe $3,000 in interest. Lots of luck with that.
  • Then, from Dec. 17, 2015, to Dec. 20, 2018, the Fed raised interest rates nine times by 0.25% each time to 2.50% – roughly where we were before the hike. Fed rates this week. During these three years, the S&P 500 rose 27% from 1,978 to 2,507and that includes a brutal December 2018, when it was clear Powell had raised rates one too many times in a midterm election year.

It’s a good time to remember the terrible years of midterm elections and their glorious fourth quarters:

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So, the last 15 midterm election cycles generated a zero net gainsplit between a 6.2% loss in the first nine months, offset by a 6.2% gain in the last three months – a Christmas bonus for patient investors.

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I’d like to omit the exception of 2018, as that would bring the Q4 average to +7.65%, but 2018 is a cautionary tale where the Fed can go wrong.

On September 27 and December 20, 2018, Mr. Powell clearly raised interest rates one (maybe twice) too many times, perhaps as part of a personal spat with President Trump, who is not couldn’t stop his tweeting thumbs from throwing nasty challenges at the Fed Chairman.

Mr. Biden, for all his faults, is not at war with the Fed Chairman, so Powell may have learned the lesson not to raise interest rates too far too fast this time. If it stops in time, this market should recover well.

Happy 235e Anniversary of the United States Constitution – This glorious pattern for a blessed stalemate

“The Constitutions of the United States are the most marvelous work ever done by the brain and purpose of man.” – British Prime Minister William Gladstone, 1878

Have you ever heard of Constitution Day? How about “Citizenship Day” or “I’m an American Day”? Whatever their name, they all fall on September 17, the anniversary of the signing of our Constitution in 1787.

Very few schools mention Constitution Day, but perhaps We the People should take the time to read “the most wondrous work ever done by the brain and purpose of man” once a year. , maybe now, since any unbiased reading of the Constitution reveals that it prohibits most of what our federal government does today.

When I campaigned for the Virginia House of Delegates in 1997, my slogan was, “The Constitution may not be perfect, but it beats the kind of government we have in Washington, DC today.”

The American Constitution demands great nobility of the human spirit. This requires compromises and debates. Most people would rather wield power, not be in a committee meeting late at night, debating compromises.

The Founders sought a balance of power – or “impasse” in today’s terminology. They were more concerned with what our federal government was NOT doing than what it was DOING.

The French philosopher Montesquieu (1689-1755) influenced many of our Founders. He wrote that “When the legislative power is united with the executive power in one person or in one body of the judiciary, there is no liberty”.

Echoing Montesquieu, James Madison said: “The accumulation of all powers, legislative, executive and judicial, in the same hands, whether in one, a few or many, and whether hereditary, self-proclaimed or elective, can justly be pronounced. the very definition of tyranny.

When one political party or the other controls all the levers of government, the concentration of power often borders on tyranny.

Democrats currently boast of controlling all the levers of power in Washington, and if you’re a Republican, you might remember when Republicans controlled the White House and both houses of Congress from 2000 to 2006.

They started two long and costly wars, widened the deficits and launched more spending programs. As I told Karl Rove during a panel in 2010, “Karl, you broke our hearts.”

Maybe that’s why stocks tend to do better when we see more traffic jams and less “unity” in Washington. And that’s why four of the last four presidents have been scolded by voters in the midterm elections, as has Mr. Biden, in all likelihood, because his party’s plurality is lighter and his popularity is lower. .

The current odds in Vegas are about 9 to 2 for the Republicans to take the House and 13 to 4 (just over 3 to 1) for the Senate. This return to the impasse expected in seven weeks should recover the market soon. The best news is that this market impulse generally continues until June of the following year.

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Leslie M. Gill