By Jeff Binkley
It’s dangerous to be a stock market prognosticator. My crystal ball broke a long time ago. Actually, it broke back in the Summer of 1994, a year after I had passed the Series 7 exam and developed the hubris that I could figure out what the market was going to do next. What I didn’t count on was the Fed raising rates SEVEN TIMES from February of 1994 to February of 1995. The Fed funds rate was 3% before the February 1994 increase. By February 1995 it stood at 6%. That was a 100% increase over 12 months.
Could it happen again? It already has.
The Fed Funds target rate stood at 0-.25% in December of 2015. By March of 2017, the Fed had raised the target rate to .75-1.0%. That’s a 400% increase with statements from the Fed indicating their intent is to raise at least two more times in the next 9 months.
What’s it mean for the markets? I don’t know. The shards from my broken crystal ball have grown cloudy with dust and age and mistaken revelations. But here is what I do know. Inflation is rising. Modestly but it’s rising. Unemployment is low. And more people are back in the workforce than have been in a long time. That’s great. But it also means wage pressures, which are a fundamental component of inflation as well. How to best keep up with inflation over time? You gotta have stock market investments. You don’t have to be out on the cutting edge of high technology or super go go growth companies that could either fly sky high or blow up shortly after liftoff. But you gotta have some stock investments. Yes, this market is high. But I believe that that is due to the low-interest rates we’ve had for the last 8 years.
There is risk to this market with the Fed raising rates. But what the market seems to understand and the media won’t let the masses realize is that what President Trump is doing is unraveling some of the most anti-capitalist, anti-growth policies and regulations the nation has ever experienced. When those policies and deregulations take full force, even if rates are higher, the market may continue this very nice upward trend.
History is a lousy predictor when it comes to markets. What happened in the past oftentimes has no bearing on what will happen in the future. BUT. After those seven interest rate increases back in 1994 -1995 with the Fed trying to slow down the economy, the market (S&P 500) went from 475 in May of 1995 to 675 in May of 1996 (42% increase). The pro-growth Congress elected in 1994 had much to do with that result. What will our pro-growth administration and Congress do for the markets over the next two years? I don’t know. But I sure think we should have a good portion of our investments in equities poised to take advantage of that potential growth.