Market volatility ticks up ahead of coming rate hike
It’s unrealistic to expect the stock market to take the first interest rate hike totally in stride, especially when investors haven’t seen a rate increase from the Federal Reserve since 2006.
Regardless of whether you think the economy is strong enough to survive the first hike in a nearly a decade — which seems likely at the Fed’s December meeting after Friday’s strong October jobs report — or whether you think even a quarter point rate increase from 0% will derail the recovery, the fact is there will be market volatility ahead of the Fed’s expected hike.
That seemed to be the message of the market Monday, when the Dow Jones industrial average tumbled nearly 180 points and all three major U.S. stock indexes fell 1%, following Friday’s flat, no-decision type-market.
Turbulence related to Fed moves isn't unusual. Back in the summer of 2013, stocks and bonds both sold off in the so-called "Taper Tantrum," when investors reacted negatively to hints from then-Fed chief Ben Bernanke that the U.S. central bank was getting ready to start winding down its asset purchases, dubbed QE.
Interest-rate hikes, by nature, change the investing landscape. It requires investors to recalibrate their spreadsheets, as it relates to earnings growth, economic growth and the relationship between stocks and risk-free assets.
It also results in portfolio shifts, as investors move away from stocks that benefit from lower rates, such as utilities, real estate investment trusts and housing stocks. Investors also shift money into stocks that fare well in rising rate environments, such as banks and companies with peppier growth trajectories.
The point? Wall Street will undergo some tense days as the first rate hike nears. But, given that rates now are pegged near zero, it seems unlikely a quarter-point hike will cause a recession or kill the 6 1/2 year-old stock bull market overnight.
In pre-market trading Tuesday, the Dow and S&P 500 were down 0.1% and the Nasdaq composite was 0.2% lower.