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Hard Times to Come?


We had a wild ride in the stock market today. You can see where the market tanked, rallied, and fell back barely up for the day (+0.24% on the day).

The culprit? The announcement from the Federal Reserve today that they anticipate an interest rate increase on overnight funds up to 1.375% (an increase of 1.25%) by the end of 2015.

Historically, rising rates are bad for the stock market. You can see the knee jerk reaction by investors that sent the market down immediately. Then, a rally ensued – and honestly I do not know what the catalyst was – but it faltered after several minutes and the market ended barely above where it started the day.

For a few years now, we have been talking about what happens when the Fed starts to raise rates.

Generally, the stock market sells off, then as the initial impact of higher rates is seen as not impacting corporate profits immediately, a continuation of the primary trend higher resumes.

Later, as rates have increased and companies have begun to feel the sting of higher borrowing costs hitting their income statement, the stock market pulls back. How far back depends upon whether the country moves into a recession or not, which is usually dependent upon how high the Fed raises rates to stem inflation.

Today’s announcement and the knee jerk reaction, in my opinion, is what we will see A LOT of in coming months as the Fed undertakes its raising of rates. Be prepared for sell-offs that will shake the faith of many investors and cause the market to either trade sideways before resuming the current primary trend up OR change the primary trend to down.

This is a news heavy week for investors, so anything can happen. Just remember that ultimately higher rates lead to hard times for investors – both bond and stock investors. It just depends upon how high rates go and how it ultimately impacts corporate earnings. Those things will be clearer with the passage of time.

However, we do know that given that the market is at an all-time high, prudence dictates that we raise a little cash, book some profits on winners and clear out some losers. This will give us cash to be opportunistic buyers when the first sell-off occurs.

So we are raising 3% to 5% cash in client accounts (unless it is a client that told us to never have cash and they will remain fully invested) so that we have dry powder available for what likely comes our way.