Since March 2009, the stock market has surged, largely due to the easy money stance from the U. S. Federal Reserve and other global central banks. A few years ago, the Fed moved away from an ultra-easy money stance and is now “gradually” raising rates. Once again, other global Central Banks followed and they are slowly moving away from their ultra-easy money stance. Just last week, the Fed raised rates by a quarter point and left the door open for more rate hikes in the future.
Several times a year, the Fed gives projections for future guidance and right now they are still on the slow and steady rate hike path. Remember, the Fed has a dual mandate: to combat inflation and help keep unemployment low. The good news is the economy is growing nicely and inflation is still not a threat. If the economic system gets too hot, or inflation covers, that will put pressure for the Fed to increase rates for a faster clip. If perhaps these events do not arise, then they will be fine and this bodes well for industry.
What The Pros Are Saying:
My spouse and i spoke to Matthew Schmidt Portfolio Manager & Analysis Analyst at Violich Capital Management with $600 , 000, 000 in assets under managing and he brought up a fantastic point about what areas of industry will benefit in this environment. Matthew told me, “Given the direction of interest rate boosts, the Federal Reserve features clearly instituted a hard to stick to period in the US which has in times past been correlated with lower normal returns for equity market segments. Looking under the hood, a number of the bigger beneficiaries on average during previous restrictive market times have been commodities and interest-rate sensitive industries like finance institutions. While investors can’t merely look at companies or companies in a vacuum and the course of Fed actions has become telegraphed for some time, we believe it is very prudent to maintain if certainly not tilt toward exposure to these kinds of areas. ”
Arthur N. Hazen Jr, President for Medallion Wealth Management, with $500 million in possessions under management, pointed out that despite the fact that we have seen a few charge hikes, interest rates are still in times past very low – and he’s concerned about the yield competition flattening. Arthur told me, “As expected the Federal Preserve raised rates for another time this year. Rates have become at their highest level since 2008. With one other increase later this year most likely and talk of three additional in 2019 our matter is a continued flattening with the yield curve. Although the economic system appears to be running hot a great inverted yield often signifies trouble. Flat is certainly not inverted however it appears that won’t take much more to arrive. ”
Seth Meisler, CFA, CPA/PFS, CFP®, Principal and Chief Investment Officer, for Affiance Financial with $610 million in assets underneath management believes the longer-term outlook for stocks and bonds will be positive in the Fed’s stance. Seth explained, “We believe increasing costs may be a positive sign, mainly because it demonstrates the Fed’s opinion that the economy continues to improve. While in the short-term, rising rates will negatively impact bond prices, the longer-term outlook for bond investors may be positive, due to higher yields going forward. For stocks, the positive outlook for the economy will hopefully translate to increased future earnings, which may offset any decreases in valuation that the rising rates may cause. ”
Bullish Fundamental Backdrop:
The Fed and other central banks are giving investors a bullish fundamental backdrop by keeping rates low and raising at a very slow (i. e. “gradual”) pace. Going forward, it is important for investors to watch the yield curve, the economy, and inflation to see if any of these factors will change the Fed’s path.