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Fear Not The Reaper

11/10/2015

One of the few affable economists in this nation is the highly-regarded Jeremy Siegel of Wharton.  Last week, he made two comments that, at first, appear incongruent.  First, he said the latest jobs report practically assures an interest rate increase when the Fed meets next month.  Second, he predicted the Dow could reach 20,000 next year, up 13.5% from yesterday’s close.

In other ways, he is predicting a nice healthy bull market despite a rising interest rate environment.  Many investors find the two conditions incongruent.  That’s why the market almost always drops when the Fed threatens to raise rates.  However, history teaches us something different.  The stock market normally rises until the third or fourth interest rate increase — but only if the market thinks more increases are not imminent.

Even if last week’s job report does push the Fed to raise rates in December, instead of March, there is no reason to suspect the Fed will launch a long series of rate increases.  Given the lack of inflation and given the relatively weak world economy, I still expect the Fed to raise rates once, just to silence its many critics.  The American economy can easily afford a minor interest rate increase, even though large multinational export companies will be hurt somewhat from the strengthening dollar, which results from an interest rate increase.  (The bigger problem is below everybody’s radar screen —  with $18 TRILLION in debt already, a quarter point increase in interest costs will blow a $45 billion hole in our Federal budget and add to our national debt — go slow, Janet!)

Dr. Siegel teaches us that an interest rate increase by the Fed is not to be feared.  He’s right!

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