Ask Matt: Will the Fed kill the bull market?

Q: Did the Fed kill the bull market?

A: Rising interest rates aren't good for stocks. But they don't necessarily snuff out bull markets either.

There's no question stocks have a tougher time when the Federal Reserve takes up short-term interest rates, as it did Wednesday. When rates are rising, some investors who owned stocks previously might sell them if less risky assets are yielding enough to satisfy them.

Companies carrying debt also face higher borrowing costs. Consumers and businesses - who might have borrowed money to buy equipment or goods - might decide to hold off instead.

But while higher rates aren't good for stocks, they don't kill them, either. The Standard & Poor's 500 delivered average 5.9% annualized returns when the Fed was "restrictive" and raising rates between 1966 and 2013, says Robert Johnson, president of the American College of Financial Services and co-author of Invest with the Fed. That's not exactly a horror show.

The big problem is that during those periods inflation was 5.1%, meaning investors only got a 0.8% annualized real return. In contrast, during expansionary times when the Fed was lowering rates, stocks turned in an annualized gain of 10.6% when inflation averaged 4.2%, Johnson says.

Paste BN markets reporter Matt Krantz answers a different reader question every weekday. To submit a question, e-mail Matt at mkrantz@usatoday.com or on Twitter @mattkrantz.