Most economists think the Federal Reserve will begin raising interest rates around the middle of the year, and many investment experts maintain that will put a finish to the six-year-old bull market.
Not so fast, says
Morgan Housel, a columnist at The Motley Fool.
Writing in The Wall Street Journal, he cites data from Ben Carlson, a portfolio manager at the Van Andel Institute, concerning the 14 periods during which the Fed hiked rates since the S&P 500 index began 58 years ago.
Carlson found that the index rose in 12 of the 14 periods. Its average annual return for all 14 periods registered 9.6 percent, including dividends. That almost matches the 10.1 percent average annual return for the index during the entire span of 1958 to Dec. 1.
So why do stocks thrive when the Fed tightens? It's because the Fed generally lifts rates when the economy is strong, Housel explained. "Think of low interest rates as medicine for the economy: You take it away only when the patient is healthy."
In fact, stocks might rise when the Fed starts raising rates, he noted.
"The Fed just starting to raise interest rates isn't associated with ending market rallies," stock guru Jeremy Siegel, a finance professor at the University of Pennsylvania, told Housel. It's usually not until the Fed has almost finished hiking rates that stocks suffer, Siegel said.
However, Housel cautioned, "None of this means the stock rally will continue in 2015, of course. History is under no obligation to repeat itself. Nor is there any guarantee the Fed will raise interest rates."
Meanwhile, star investor Jeffrey Gundlach, CEO of DoubleLine, doesn't think Fed rate increases will hurt bonds this year. Indeed, the 10-year Treasury yield might break its record low of 1.38 percent, he told
Barron's.
That mark was set in July 2012.
Bond yields are especially likely to decline if the plunge of oil prices continues, Gundlach explained. Declining oil prices help bonds because of their deflationary impact.
Foreign investors also will flock to U.S. bonds, turning away from the low yields and weak economies of Europe and Japan, Gundlach said.
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