Tags: investors | federal reserve | rates | returns

New Research Shows What to Expect from Stocks When the Fed Does Act

New Research Shows What to Expect from Stocks When the Fed Does Act
(Dollar Photo Club)

Wednesday, 23 September 2015 09:00 AM

Last week, Federal Reserve officials deferred action on interest rates. Eventually they will need to take action and raise rates. Based on history, stock markets will struggle whenever the Fed finally acts.

Recent research by Robert Johnson, President and CEO of The American College of Financial Services in Bryn Mawr, Pa,, found stocks underperform as interest rates rise. Most of the long-term gains in stocks accrue to investors while rates are falling.

In Invest With the Fed (McGraw-Hill, 2015), Johnson and co-authors Gerald Jensen of Creighton University and Luis Garcia-Feijoo of Florida Atlantic University showed from 1966 through 2013, the S&P 500 averaged an annual return of 15.2 percent when rates were falling interest rates and just 5.9 percent when rates were rising.

Fed economists are undoubtedly familiar with data similar to this.

This could be one reason the Fed is now deferring action based on their newfound concerns about the international situation.

The Fed had been focused on U.S. unemployment and inflation prior to its most recent meeting.

By citing international concerns, the Fed could be looking for a reason to put off raising rates as long as possible, or at least past the next Presidential election.

Knowing stocks are likely to underperform adds another dimension to the Fed’s decision. Igniting a bear market during a presidential campaign could swing the election.

Investors facing losses could very well blame the current administration and vote to change the party in the White House.

Johnson cautions “investors across the investment spectrum should expect lower returns when the Fed begins raising rates.”

Lower returns could have far-reaching effects in the economy and in politics.

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MichaelCarr
Last week, Federal Reserve officials deferred action on interest rates. Eventually they will need to take action and raise rates. Based on history, stock markets will struggle whenever the Fed finally acts.
investors, federal reserve, rates, returns
272
2015-00-23
Wednesday, 23 September 2015 09:00 AM
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