The economy is growing. Unemployment is declining. Wage growth is finally picking up. Investors should be rejoicing. Wrong!
Now the Federal Reserve will need to raise interest rates to keep the economy from growing too fast. It would seem that good news is really bad news for investors – or is it?
It was only in October that a weaker-than-expected jobs report sent the market higher because the Federal Reserve would not need to raise interest rates. Does the Federal Reserve really have this much influence on the value of companies? Do we really want the economy and jobs market to do poorly so the stock market will move higher? Of course not.
A growing economy and vibrant jobs market is good for America’s companies and should eventually lead to higher stock prices. The fact that the Federal Reserve believes the economy is growing sufficiently and can sustain higher interest rates is a good sign. A gradual increase in interest rates over time should not lead to a stock market sell-off. It was a rapid increase in interest rates in 1987 that contributed to the crash in October that year. Interest rates rose by several percent in a few short months. It’s unlikely the Federal Reserve would move that aggressively, especially in a presidential election year with inflation virtually non-existent.
Some investors are more worried about bond prices than stocks during a rising interest rate cycle. Bond prices usually fall as interest rates increase. The amount of price movement will again depend on how quickly the Federal Reserve raises rates. Investors who have a large fixed-income allocation, and especially those holding long-term bonds greater than 10 to 15 years should review their holdings to make sure they are comfortable holding their bonds until maturity. Bonds should mature at face value no matter what happens to interest rates.