You won’t believe me… but it’s true…
Stock prices and house prices actually do extremely well when the Fed STARTS raising interest rates…
I know, I know. I get it.
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It shouldn’t happen.
Rising interest rates should be a “negative” for stocks, as corporate borrowing costs go up and profit margins go down.
But it turns out, these things don’t hurt stock prices… Based on history, stocks go up.
Let me explain…
Since 1950, stocks have performed incredibly well when the Fed has started raising interest rates (called “tightening”).
And stocks have actually underperformed when the Fed has started cutting interest rates (called “easing”).
Take a look:
Just yesterday, the Federal Reserve announced that it’s raising interest rates for the first time since 2006.
The rate hike is minor… It’s almost irrelevant. What’s happening is, the Federal Reserve is trying to get interest rates more “back to normal” as opposed to “tightening.”
In the case of Fed rate hikes, the first rate hike does NOT tend to end bull markets. That might be because people are optimistic, and the first interest rate hike is a sign that things are getting back to normal.
Over the last 30 years, stocks have moved higher in the two years after a rate-hiking cycle began.
The Federal Reserve just hiked rates. Based on history, stocks could go higher over the next two years.
It’s not all roses… Stocks tend to fall for a couple of months after the first time the Fed starts hiking rates. Then stocks enter a strong move higher.
We can’t know for sure what will happen this time… There is no guarantee of a small downward move followed by a big upward move. But history is the best guide we have. And that’s what it tells us.
The story is similar with U.S. house prices…
It’s easy to make the case that house prices SHOULD go down when interest rates start to go up, as you would think that mortgage rates would go up.
But history tells a different story about house prices after the Fed starts raising interest rates…
Going back to the late 1960s, house prices perform incredibly well when the Fed starts raising interest rates. Take a look:
Most folks simply assume that the Fed raising interest rates is a bad thing for stock prices and for house prices.
Don’t fall for this myth. It’s simply not true.
The Fed is hiking rates for the first time since 2006 right now… But the start of a rate-hiking cycle is not a bad thing, based on history.
U.S. stocks and house prices can still go much higher from here…
Good investing,
Steve
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Source: Daily Wealth