How Rising Interest Rates Can Affect The Stock Markets

The most common effect of increasing interest rates is to control inflation. Inflation is caused by having too much demand for goods for too little supply which causes prices to increase. By tightening the availability of money to purchase goods, inflation can be controlled. 

Clearly, changes in interest rates affect the behavior of consumers and businesses, but the stock market is also affected. The most recent volatility is a reminder that we are now seeing a changing dynamic after 3 years of low volatility and steady returns. 

According to Paul Ashworth, chief US economist, “the longer the Fed delays now, (increasing interest rates) the higher interest rates will eventually have to go". This was reported in the September 18th issue of the Financial Post. 

If history is an indication, during interest rate increases, according to Guillermo Felice’s, head of currency strategy at Barclay's Capital, "stocks, although they sell-off during periods of rising interest rates, tend to recover their losses quickly, while US treasuries experience the opposite. 

Michael Harnett, chief investment strategist at bank of America Merrill Lynch, is clearly in the stocks-over-the bonds camp as I am. In a recent article in the Financial Post, he is quoted “low but rising rates, tame inflation, moderate EPS growth and an improving US economy are the sweet spot for stocks. 

Some investors might be tempted to time the markets, however as history clearly shows, timing the markets is for most, a recipe for creating losses. Remember, the markets run in cycles, and, at the end of the day, if we could forecast these cycles, you, I, and all of these analysts and prognosticators, would be so wealthy, that Donald Trump would appear to be a pauper. 

I personally believe, and have been tooting my horn for years, that a great way to invest for the long-term is by owing companies with a history of rising dividends in the five major market sectors. Although counter intuitive to many investors, buying great companies with a history of solid dividend payments while on sale, provides the investor via dividend re-investments, the opportunity to own more shares and therefore the potential for greater wealth in retirement and in turn potentially more dividend income resulting from owning more shares. Dividends cannot be guaranteed, however, by selecting the appropriate investments, with a history of rising dividends, coupled with having wide moats and be moth branding, I certainly will take that to the Bank. 

Remember the difference between speculating and investing can best be summed up by Warren Buffet when he stated “you can't get rich with a weather vane." 

HAPPY INVESTING.