What Will the Market Do When Interest Rates Go Up?

By Malcolm Berko

July 29, 2015 5 min read

Dear Mr. Berko: I just retired at age 67, and my certified public accountant, who is a friend, insists that I hire a money manager to run my $680,000 individual retirement account. Do you have any idea how difficult it is to find a money manager to trust? I trust your recommendations, so could you please suggest a money manager in Cleveland?

Lastly, could you tell me what the Dow Jones industrial average will do when the Federal Reserve raises interest rates this year? With unemployment at 5.4 percent, which matches pre-Great Recession numbers, higher rates seem to be a certainty pretty soon. — GD, Cleveland

Dear GD: Over the past dozen days, I've completed a proprietary, statistically skewed, unprofessional survey of 11 money managers, eight of whom have egos that would make Donald "Donboy" Trump blush. Most believe that when the Fed raises rates, the industrial and utility averages will fall like tears from a tall camel's eyes. And nine of those magnificent 11 believe that the Fed will raise rates too soon, causing the Dow to crash to the 15,000 level. However, two of them believe that the averages will rise when rates are increased. The following is an old adage I just made up: "The market will always do what it's expected to do but never do it when it's expected to." So it follows that because most folks expect the market to fall when the Fed increases rates, the Dow may actually rise when rates are increased. The two dissenters figure that the higher interest rates could allow the industrials to caress the 21,000 mark by 2016.

Let's look at the record, which is really kind of mixed. Researchers at Standard & Poor's looked all the way back to World War II and analyzed 16 previous rate-tightening cycles. They discovered that 80 percent of the time, the Fed's move to raise rates led to stock market declines of at least 5 percent. However, a similar study by T. Rowe Price analyzed the question in a slightly different way and determined that in nine instances since 1954 when the Fed raised rates after a recession, the Dow Jones industrial average rose by an average of 14 percent a year later. However, I can tell you with certainty that it will be a bumpy ride, and I hope the money manager you find has the proper shock absorbers in your portfolio.

I'm not so confident as most folks about the Fed and its influence on the economy. Milton Friedman, who was awarded the Nobel Prize in economics, was not a Fed aficionado. Friedman believed that the Fed does more harm than good and accused it of mismanagement and too frequently causing rough spots in the economy. Friedman said that after the Fed has reviewed its data, it acts either too soon or too late. And in today's theater, some Fed-watchers think Chairwoman Janet Yellen is repeating this mistake by relying on conflicting employment data. Yes, the unemployment rate is where it was just prior to the Great Recession. And June was the third month in a row in which more than 93 million Americans 16 or older were unemployed. It's getting worse, worser and worserer! However, it seems that neither the Fed nor the Bureau of Labor Statistics considers 93 million unemployed an important number. Nor does the BLS notice the small fractures in the economy, such as Gap's laying off 255 people and the fact that Zoetis, Honeywell, Johnson Controls, Katy Industries, J. Crew, Symantec, PetSmart, The Hershey Co., eBay, Intel and Discover cashiered 165, 252, 310, 155, 175, 170, 422, 300, 286, 349 and 502 employees, respectively, just last quarter. And increasing the fracture of last quarter, JPMorgan Chase, Bank of America, Viacom, IBM, Merck & Co., Hewlett-Packard, Pfizer et al. laid off tens of thousands, and A&P declared bankruptcy. If rates rise, unemployment numbers may crush the averages.

Yes, I know how difficult it is to find a money manager to trust — one who explains thing clearly and is knowledgeable, wise, caring and experienced. Unfortunately, the professionals I know in Cleveland have closed their practices or raised their minimum account sizes, so I can't help you. Certainly, your CPA friend should be able to help you find the right manager.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at [email protected] To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

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