We had an interesting anniversary this past week for the stock market, and it has now been eight long years since the S&P 500 bottomed at 666 back in early March of 2009. This marked the bear-market bottom of the financial crisis of 2008-09 that saw the Lehman Brothers collapse and the popping of the housing bubble. We have somehow bounced back through interest rate cuts to near zero and a whole lot of Federal Reserve buying of “distressed assets” through emergency programs like TARP. Amazingly enough, Ben Bernanke’s and the Fed’s policies saved us from repeating a Great Depression, but we still had to go through what they now call the “Great Recession.” The S&P 500 closed Friday at 2,372, so something must have worked well.
So where are we headed from our current juncture with the stock market near all-time highs and interest rates still artificially low? That is the big question. The Federal Reserve meets next week, and a rate hike is all but certain. The 235,000 new jobs number we saw on Friday was an impressive report, but it was not enough to get the stock market up and running back toward its recent all-time highs. We did see the major indices rise on Friday, and it was a nice way to head into the weekend. For the week, however, the major indices posted losses, with weekly declines of 0.5% for the Dow, 0.2% for the Nasdaq and 0.4% for the S&P 500.
What may have had stocks on hold this week was the thought that Janet Yellen and the Fed may follow through on its hints at three rate hikes on the way for the rest of the year. There were even comments from strategists that four rate hikes for 2017 could be a possibility, so that might explain why stocks are in a holding pattern. The zero interest rate policies (ZIRP) we saw in the U.S. and Europe over the past eight or so years may have prevented another Great Depression, but critics of these policies say that zero interest rates distorted the global economy and led to a lot of “map-investment,” as they call it. The ZIRP policies and bank bailouts were supposed to be temporary, but “temporary” turned into eight years.
With the current economy in the U.S. seemingly strong, the Federal Reserve now has the leeway to raise rates back to more “normal” levels. This has been great news for the banking and financial sectors, as we have seen these sectors lead the post-election rally in the stock market over the past few months. It has been so long since we have had “normal” interest rates, though, that no one knows how the stock market will react to rising interest rates. Warren Buffett has said that the stock market is still very attractive, but he did add in that higher interest rates could put a lot of pressure on stocks. This is the current conundrum that bulls are facing.
A vibrant economy, strong jobs growth, and a booming housing market pave the way for the Fed to raise interest rates. The stock market historically does not react well to Fed rate hikes, and we have only had two rate hikes in nearly ten years. It will be interesting to see what happens this coming Wednesday when the Fed is likely to raise short rates by a quarter point. Investors will be listening closely to what the Fed says about its outlook for the rest of the year, and the big concern is what happens if the Fed does indicate that multiple interest rate hikes are on the way. The economy is strong, though, so at least the Fed has picked an opportune time to “normalize” interest rates.
Another “wild card” for investors to worry about is the coming debate in Congress to raise the debt ceiling for the United States. Politics will be back in play, and the last thing politicians want to do is panic an economy with all of the “government shutdown” fears. Congress somehow muddles through this every few years, and the strange thing about the massive government debt is that it is so massive, the thought is “what’s another trillion or two” among friends. This topic will be in the news over the next couple of weeks, so we will see how our elected leaders deal with it. The odds are that they will raise the debt ceiling and hope the economy grows. Some things never change!
That said, the Gorilla wishes each and all a relaxing weekend. We have had a very quiet week in the stock market, and we should see some direction next week once we hear from the Fed. We will continue to watch the economic numbers, and as long as they remain strong, those numbers will validate the lofty levels we are currently seeing in the major indices. March Madness college basketball is on the way, and it promises to be a great tournament. We will be back in action on Monday, so again, have a great weekend!
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