Fed Action: Low & Slow
By James Herrell, CFA, Director of Investments at Partnervest Financial Group, and Portfolio Manager of the AdvisorShares STAR Global Buy-Write ETF (VEGA)
In what may at first seem to be a counterintuitive reaction, stocks did not immediately rise when the Fed made the decision to leave rates unchanged at their September meeting. Aren’t low interest rates a positive for the market?
Not always. It appears that the dip following the Fed announcement was due more to the acknowledegement of a global economic slowdown, and fears about the effect on the U.S. economy. The present situation notwithstanding, low-to-zero interest rates have indeed had a positive impact on U.S. equity prices. After nearly seven years of stimulus, the result has been a surge in stock prices to new highs and beyond.
Rising interest rates, when they finally occur, may turn out to be a positive factor as well, especially when they commence from low levels. Consider the following chart showing the performance of the S&P 500 and the level of the Fed Funds rate over the last three easing cycles. While the market may have had an adverse reaction to the initial rate hike, prices rebounded as the rate hike cycle continued.
At the present time, consensus opinion is an expectation for the Fed to finally begin a long-anticipated series of rate hikes starting at their December meeting. The trajectory is expected to be low and slow. In any event, once the rate hike cycle starts, the market rally might continue , albeit at a more measured pace than previously.