The days of smooth sailing are likely over for investors as the economy heads into uncharted waters.
The Federal Reserve is widely expected to raise interest rate later this year, perhaps as early as June. The Fed tried to jumpstart the economy during the Great Recession by cutting rates down near zero in December 2008. It hasn’t touched rates since.
The stimulus fueled a stock market surge. The S&P 500 has risen about 200% since bottoming out in March 2009. A rising tide lifted all boats. But that rising tide — the Fed’s stimulus — will soon fade.
Everyone knows what’s coming, but experts disagree on whether stocks or bonds will get hit the worst.
History isn’t very helpful in giving clues about what will happen.
“We don’t have a ton of experience because over 25 years the Fed has only really tightened policy three separate times,” Dan Greenhaus, chief global strategist at BTIG Research, said of rate hikes. “Who wins, who loses, you sort of have a firm idea but it could change from one end to the next.”
Since 1990, the Fed raised rates starting in 1994, 1999 and 2004. But those years marked the beginning of long periods of rate increases. Most experts see this rate rise by the Fed as a one-and-done deal for 2015. Call it a tip toe rate increase, not a sprint.
In short, there’s no close comparison to these times, especially anything equivalent to coming out of the Great Recession.
The Fed is cautious. American markets are already off to a rocky ride this year. The Dow and S&P 500 both dropped 3% in January while bonds rallied, driven by foreign investors who want a safe bet.
Events abroad are pressuring the U.S. economy and American businesses. China’s economy is slowing down. Europe just announced the start of its stimulus program. The new Greek Prime Minister, Alexis Tsipras, is already causing tension with his peers on the continent. Oil prices are still very low. The strong U.S. dollar is making American exports less attractive to foreign buyers.
On top of all those factors, the build-up of anticipation to the rate rise could cause even more market volatility. If the Fed doesn’t properly communicate the timing and amount of a rate hike, that could cause havoc, which is why the Fed has been signaling very loudly about its intentions to do a small increase this year.