13Q2 Talk with Us

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What do interest rates have to do with the market anyway?  We have had plenty of good markets with rising interest rates as well as falling ones.  Bad markets have also occurred during rising as well as falling rates. However, investors do perceive there is some correlation between interest rates and the stock market.

Stocks are most affected by interest rates at extreme levels.  In the middle ground, earnings and other factors are usually much more important.  However, if interest rates are rising and approach elevated levels because the Fed is trying to rein in inflation, then interest rates certainly do matter.  This may indicate that the Fed will engineer and economic slowdown or possibly a recession.  Therefore investors should anticipate falling earnings and stock values.

If interest rates are falling because the economy is slipping, the economy and the prospects for future earnings become far more important than the falling rates.  However, falling rates after an economic slowdown may be an indicator that the worst is over and future prospects will soon be improving.

Rising rates because the economy is improving is good for stocks.  The rising rates indicate economic strength and the prospect for better earnings, higher dividends, and the prospect for higher valuations.  (This is where we find ourselves with the stock market today).  This continues to be true until the Fed forces rates beyond reasonable levels.  They will only do this if they perceive that inflation is getting out of control or some asset bubble might be rising.

If our economy remained so weak that the entire stimulus from the Fed merely kept the economy in place, then that would be worrisome.  Investors would rightly have very little confidence in future prospects.  That is not the case.  The economy has been growing since the summer of 2009.  The growth rate has waxed and waned, but otherwise has been pretty consistent.  Higher growth, now that housing is recovering, is in the offing.  That is precisely why we see higher interest rates as positive and a sign that economic improvement is actually accelerating.  So if you want to work with a firm that looks beyond the obvious and discerns both risk and opportunity, the Talk with Us.

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