December 15, 2015
Will an Interest Rate Hike Kill the Stock Market?
by Ryan Fitzwater, Senior Research Analyst, The Oxford Club
It’s happening again.
Everyone is clamoring over the Fed’s upcoming Federal Open Market Committee (FOMC) meeting set to take place December 16.
The big question on investors’ minds is: Will the Fed finally abandon its zero-interest rate policy and raise rates?
As you can see in the chart below, our current monetary policy is unprecedented. Abnormal. Insane even. No doubt, it will have its own chapter in the history books.
Rates have been stuck close to zero for five years and counting. Hence the term “zero-interest rate policy (ZIRP)” that comes from a mixture of slow economic growth and low interest rates.
It’s not Earth-shattering news that interest rates are in ultra-low territory. In many ways, rates are virtually nonexistent. That fact has stirred one of the greatest, most resilient bull markets in history.
But we ask… Would an increase be so awful?
Most people think a hike is bad news. It will kill our sluggish economy, they argue. But if and when rates get lifted, these folks will miss out on a big opportunity to profit. You only have to look at the past to see why.
Why Smart Investors Should Be Praying for a Rate Hike
The chart below illustrates how the market reacted the last six times the Fed increased rates. To make this comparison as accurate as possible, we only looked at increases that came after a rate decrease.
As you can see, history shows that the anxiety surrounding higher rates – and its supposed negative impact on the markets – is unwarranted.
The numbers are broken out in the table below.
In the three-, six-, 12- and 18-month periods after a rate hike, the S&P has averaged positive returns. In fact, a year out, the index is showing more than a 12% gain. So while the initial market drop may seem unnerving, history has shown that it’s followed by a strong rebound.
Of course, the S&P 500 is a broad-based index. And as we dug deeper, our research revealed that not every sector and stock is a winner.
For example, energy tends to underperform following a rate increase. But add in $200 billion in high-yield energy debt, crashing crude prices and negative cash flow, and we see potential bankruptcies on the horizon. You don’t want to have any exposure to stocks in these industries after a rate hike.
At the same time, we discovered specific sectors and assets that completely crush it after a rate hike. Information technology (IT) is one sector that jumps an average 16.12%. The top performers do even better.
A lot of time and research went into discovering the winners and losers following these increases. So we put together a special report called “How to Survive and Thrive an Interest Rate Hike.”
Inside, you’ll discover what you need to do to protect your wealth immediately after a rate increase. And you’ll also learn how to book substantial profits in a rising rate environment.
Just enter your email address below to get instant access to this eye-opening report for free on the Investment U website:
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