There's Always Something To Worry About

There is always something to worry about.

I would like to take the opportunity to provide you with our viewpoint on a couple of important events that are dominating the financial news. One is an imminent rise in interest rates. The Fed has been alerting the markets that they want to raise rates from zero (where rates have been since 2008) to .25%. We do not have any clarity as to when this will actually occur.

Our research shows that past rate hikes have had differing effects on the stock market. Going back to the early 80’s, there have been six rate hike cycles. Using a time period of 250 trading days, we found that while pockets of weakness surrounded rate hikes, equities generally weathered the storm with an average gain of 2.6%.* In most cases, stocks performed well prior to rate increases, then struggled or declined slightly after the onset of hikes, only to recover and outperform in the two years following the first rate increase.

Is this time different? There are a couple of factors that would cause us to say yes. First, there is a key difference between the current environment and previous rate increase cycles---the starting point is much lower. How much of a drag will there be on economic growth if rates rise to .25%? I would have to think that it would have to be fairly negligible.

On the other side of the coin is the fact that we are long overdue for a correction of 10% or more. The last time we had such a correction was 2011 and we typically see a correction of this magnitude every  1½ years.

The other event that is in the news is Greece and its potential exit from the Eurozone. The deadline for this stalemate to break is June 30^th when The Greek government is scheduled to fork over about $1.7 billion to the International Monetary Fund as repayment for some of its outstanding bailout loans – despite reports that Greece just barely managed to scrape enough cash together to meet last month's deadlines. The most recent negotiations came unraveled. Unfortunately, there is no recent history associated with such an occurrence that we can look back at.

Markets are constantly faced with unknowns and no one knows in advance what will ultimately transpire.  In our opinion, however, the markets are very efficient economic forecasters.  World events that are well publicized, thoroughly analyzed and discussed in advance are quite frequently just minor ripples in the market when they finally do transpire.  The markets have a way of adjusting to the news and “pricing it in."  Events that are unpredictable or unexpected are much more likely to be the cause of a major market movement.

*Source: Barron’s.com