Mark Hulbert has a piece this morning at MarketWatch in which he de-correlates the first Fed interest rate hike from any supposedly corresponding stock market movements. I agree with some but not all of what he writes. Let’s take it a chunk at a time.
Are you obsessed with whether the Federal Reserve will begin to raise official interest rates in July, September or sometime next year?
No. I’ve wanted them to do it for years now. So I’m obsessed with why the Fed refused to raise rates, despite a strong economy and inflation signals that were not nearly so tilted toward the dis-inflationary end of the spectrum as they are now. I am obsessed with wanting to know why the mainstream media and financial establishment even take their oh so heavily anticipated policy decisions each month seriously. I am obsessed with the all too obvious underlying message that this is all about a stock market ‘wealth effect’ that eventually trickles a little stream down Main Street, with Grandma and other prudent savers thrown in the gutter.
A review of historical data fails to find significant statistical support for believing that higher rates are in themselves bad for the stock market. And even if they were, the difference of a few months in the timing of increases makes little difference when determining if equities are expensive or cheap.
I concede that both of those beliefs are far from conventional wisdom on Wall Street. But the job of the contrarian is to challenge norms.
Agree. But I am not sure why Mark is using the 10-yr yield in his article. With the Fed at work on all parts of the curve, the whole thing is corrupted and not subject to extrapolation of historical data anyway. But insofar as it would be, why not use the Fed Funds rate or the 3 Month T Bill? This chart from NFTRH has clearly shown that rate hikes did not matter to the stock market for extended periods on the last 2 cycles… until of course, they suddenly mattered… big time.