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Federal Reserve Interest Rate Hike and the Average Investor

With the Federal Reserve having raised the interest rate for the first in a year, and the second one in a decade,   many average investors may be at a loss as to how to invest or how it affects the stock market, period

Let’s look at some of the sectors that make for good plays during rising interest rate environments and what to avoid.

As you may have watched the Dow has enjoyed reaching historic record over the past several months. This happened after the elections where the Dow, Nasdaq and S&P 500 took off as if on speed.   Stocks went up.  I thought what’s going on?  Why?

First, we know for sure that financial markets hate uncertainty, but with uncertainty the perception of uncertainty grows along with higher premium demand by traders as compensation for taking the greater risk. I think we can agree that the U.S. isn’t generating enough tax revenue, with the spending growing far too much.

According to the economist in the media, our economy is in better shape with an unemployment rate of “only” 4.7 percent in February 2017 from 4.8 percent in the previous month, but this number is historically recessionary. Most have figured out that it is deceptive because its denominator is based on people “looking” for work (in contrast to those “eligible” to work) and the subset looking for work (i.e., the labor participation rate) is only 63% of those eligible.  http://www.tradingeconomics.com/united-states/unemployment-rate

When Fed Chair Janet Yellen had decided to raise rates by a quarter of a point, U.S. market indexes turn and go lower.  So my recommendation in not take excessive risks and simply invest in successful companies while they are small.   This way you can ride their appreciation potential to the fullest during the high-growth stage of their corporate existence.

The stock market has become increasingly controlled by heavily invested institutions that focus only on the largest stocks.  This actually pushes prices up and down based on “risk on” and “risk off” macro views of the global economy. Plus, the fundamentals of individual large-cap companies doesn’t mean much anymore, because these large caps rise and fall in unison because they are traded in big baskets called ETFs. We will discuss ETF another time.

 What’s historically happened after a rate hike?

Interest rate hikes usually don’t go over well with investors. Normally, stocks and positive economic surprises move in tandem, but since late 2012 they have diverged – another one of those worrisome divergences. The reason is rooted in the same rationale that applies to consumers who don’t favor rate hikes – they lead to higher borrowing costs.  Companies are flush with cash but don’t invest in business expansion because the real economy is moribund, so they use the cash to buy back their own stock, reducing supply and pushing prices up, but are limits to this buyback activity.

Chris Kacher, managing director of MoKa Investors, week published a graph in the middle of March 2017 of the Dow’s performance since 1896 that charts how the index’s peaks and troughs have reflected the U.S. economy’s triumphs and tribulations. The graph demonstrates how the Dow has become a chronicle of investors’ responses to significant global events, but shows that 109 sessions without a 1% drop, the Dow fell 1.1% on March 21st as President Donald Trump’s ambitious agenda ran up against the reality of politics.

I bet on some of these indexes during the Brexit and Actual Election Vote and other times, and I remain a proponent of te smaller less known companies than risking the media being right in its prediction, they haven’t been too many times.  You know it’s psychology in action and unless you are in the right ‘clique” and  you shouldn’t be risking your money on “betting” on these index directions than on some where your odds to understand trend direction (to be discussed in the upcoming future) and improve your odds in your favor to even 80% without caring about the news.

Diana

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