Are Interest Rate Hikes All That Bad?

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By Jacob Maslow

interest rate pressureThe US stock market and global stock markets by extension walk on egg shells whenever the US Federal Reserve issues the notes of its meetings. The conventional wisdom is that if the US Federal Reserve hikes up interest rates, the stock market will crash. It is true that there would be a downward pressure on the stock market immediately after a US Federal Reserve interest rate hike.

However, look at the historical record from 1958 to 2007. Whenever the US Federal Reserve votes to boost interest rates, for the most part, the stock market as measured by the S&P 500 rises. In fact, from July to November of 1961, right after the US Federal Reserve boosted rates, the S&P 500 appreciated by 47.5%. A more recent example is from December 2003 to July 2007. After a Federal Reserve interest rate boost, the S&P 500 registered a 46.9% gain.

The problem with the stock market is that it appears to be populated by teenagers. Really, that is what it behaves like. Why? They want their cake and eat it too. On one hand, they want a normal economy. What is a normal economy? Interest rates are going up, unemployment is going up and down, and there are realistic price-per-earnings ratios. On the other hand, they also want their current party. They want the Dow Jones industrial average to register record after record on an almost monthly basis.

Unfortunately, you can’t have your cake and eat it too. That is not being realistic. What’s the bottom line? There is nothing to fear from an interest rate hike. In fact, it is a sign that the US economy is finally being normal again.

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