Investment Strategies: From Wall Street to Main Street Hingham MA

By Craig Hartnett of Hingham MA

The Federal Reserve has been raising interest rates because the economy is at full employment. Normally full employment causes rising inflation which the Federal Reserve will address by raising interest rates aggressively to cause an economic slow down / recession and reduce inflation pressures.

The rate increase in June was the Fed's third rate hike since December. The Federal Reserve's key interest rate will now be in a range between 1% and 1.25%. The Federal Reserve has now raised rates by 1% with the last 3 increases being done more rapidly (December 2016, March 2017, and June 2017 which is every other meeting).

The bull market for stocks has continued and the rise has been dramatic following the Presidential election. This rise was fuelled by optimism around President Trump’s policy agenda and a resurgence in corporate earnings.

The stock markets performance over the medium and long run is driven by the growth/decline in corporate earnings.

Since 1955 there have been 10 bear markets in U.S. stocks. All 10 bear markets occurred after the Federal Reserve raised interest rates by at least 1.37% which caused either a recession (80%) or an economic downturn (20%). Leading into the two bear markets that did not precede a recession, the Federal Reserve raised interest rates by a much more modest amount. These two bear markets where much shorter, averaging 5 months as compared to 16 months for the eight bear markets that did precede an official recession.

Today, the stock market is highly valued by many metrics. This is typical toward the end of a long economic expansion.

However, the Federal Reserve has not increased interest rates enough yet (speed / amount) to cause a major economic slow down / recession and a corresponding a bear market in the near term.

This is meant to provide perspectives and not a recommendation from Craig Hartnett to Hingham MA and the South Shore community investors.