Investors need to dispense with the tactics that have worked since the financial crisis seven years ago, and prepare for a world that doesn’t depend on the Federal Reserve’s largesse for stock-market gains, says Brian G. Belski, chief strategist at BMO Capital Markets.
He says investors need to look at the bigger picture of business cycles for some much-needed perspective on the direction of markets during a time of rising interest rates and falling commodity prices.
“A great number of our institutional clients have not lived through an investment cycle like the one that we believe is developing,” he says in an August 7 report
obtained by Newsmax Finance. “Namely, a cycle driven by U.S. stocks, North American growth and the fundamental stability that both provide.”
Markets are coming to grips with the possibility that the Fed will begin a rate-hiking cycle
for the first time since 2004. The central bank has held interest rates near zero percent since 2008 as part of an effort to help the U.S. economy recover from its worst decline since the Great Depression.
The possibility of a rate hike has helped to boost the value of the U.S. dollar compared with other currencies, while also putting downward pressure on commodities such as gold, oil and industrial metals. Meanwhile, the S&P 500 stock index
has risen 0.9 percent this year through August 11, making it the weakest performance since 2011 when it was little changed.
Belski says current investor skittishness is “a direct result of excesses and calamities derived from two recessions, two bubbles, multiple wars, 9/11 and a general retreat from America in terms of jobs, confidence and money.”
Investors need to change their thinking to recognize that a stronger dollar isn’t a harbinger of weaker stock market performance compared with past periods, Belski says.
“We have been surprised by those investors who have argued that continued economic and stock market momentum requires a weaker U.S. dollar,” he says. “The direction of the U.S. dollar by itself does not have a significant impact on stock market performance.”
Also, higher interest rates should be welcomed as a sign of a stronger underlying economy with market gains, Belski says.
“According to our analysis, results are significantly better during periods of Fed rate hikes,” he says. “This makes sense to use given the fundamental reasons the Fed would raise rates, namely that prospects for economic growth have brightened. Higher rates help to diffuse any related potential inflation pressures.”
Investors are also too focused on weakness in commodity prices, Belski says. Oil prices
have crashed in the past year, while copper and iron ore are also hitting multiyear lows.
“Commodities were a driving force behind the last investment cycle,” Belski says. “As is investor nature, most spend too much time focusing on what worked last time despite the fact that new cycles have a tendency of ushering in new leadership.”
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