In the weeks following the Presidential election, stocks have staged an impressive rally. Since election night, the S&P 500 has risen 6.6% and the Dow Jones Industrial Average has climbed 9.0%. In the process, every major stock market index has registered new all-time highs.
But the surprising market reaction has not been limited to just stocks. Interest rates have also risen dramatically, causing a slide in bond prices (bond prices move inversely to interest rates). The result has been a -2.7% decline in the Barclays Aggregate Bond Index over this period.
Adding to the intrigue for bonds is the Federal Reserve’s FOMC decision to raise rates from .25% to .50% at it’s meeting today, December 14. Although the Fed has not changed the Fed Funds rate since last December, it was widely expected that they would announce today’s rate increase. This should result in bond yields rising across the board. In recent years, any action (or hint of action) by the Fed to change interest rates has caused significant reactions in the stock and bond markets.
So, with the Fed ‘s decision to hike interest rates, should investors worry that this will derail the post-election rally? In short, we do not think so. We feel that a Fed action to increase interest rates signals their confidence in the economy, which is a very positive sign.
Despite the rise in interest rates in recent weeks, which is essentially the same as a Fed rate increase, the stock market has boasted an impressive rally. In this case, money has been moving away from bonds and into stocks as investors are feeling optimistic about the future of the economy.
It is also important to note that we have been in an extraordinarily low interest rate environment for many years. So much so, that rising interest rates should be viewed as a positive rather than a negative for stocks. According to JPMorgan, there is a positive relationship between rising interest rates and the stock market when the 10-year US Treasury bond yield is below 5%, as it is now. So their research suggests that we can see a rising stock market along with rising interest rates, at least for a time.
Rather than fearing rising interest rates, we welcome this as a sign that we are escaping the long-shadow of the 2008-09 financial crisis and financial markets are starting to move back toward their historical norms. A continuation of the stock market rally following a rate increase by the Fed could be a clear signal that investors are finally ready to move on from the anxiety and pessimism that has weighed on the market since the “Great Recession.”
If you would like to discuss our opinions, outlook, or your portfolio in greater detail, we would be happy to schedule a meeting or a conference call at your convenience.
Horizon Wealth Advisors is a Houston based fee-only wealth management firm. Horizon is a fiduciary advisor. We specialize in helping successful individuals and families understand, organize, and manage their often complex financial situations. Horizon offers integrated financial planning and investment management services.