Rising Rates Won't Kill Market Gains

When will this bull market end? When you least expect it!

That's the "rule" of bull markets. Bull markets power past all rational thought, all the nay-sayers, and all the doubters. Only when everyone is sucked in, and there is no one else left to buy, only then does a bull market end.

But rising rates aren't likely to be the trigger for a huge market decline, if you look at historical precedent. Here are the facts, from the man I consider the best market historian and technician of our time: Jim Stack, editor of the InvesTech Research Newsletter.

Stack correctly commented that the June stock dip on the Fed report was a "knee jerk" reaction to fears of higher interest rates -- a reaction not based on historical precedent. Here's what he told his subscribers in his newsletter two weeks ago:

  • During the past 11 tightening cycles, when the Fed made its first discount rate hike (which it has yet to do), the stock market was higher 12 months later 73 percent of the time -- with the majority of those periods showing double-digit gains.
  • And, in the 17 times where the market was ahead of the Fed in boosting rates (i.e., 10 year Treasury yields rose over 1 percentage point from a notable low), the stock market was higher a year later, in over 70 percent of those instances.
  • In other words, when this move ends, the odds are that it won't be just because interest rates are rising!

    (For more on what sectors outperform during rising interest rate cycles, you might want to check out the InvesTech newsletter.)

    So beware of pronouncements that Fed rate increases will kill this bull market. Oh yes, there have been and will be "corrections" and "retracements" and pronouncements by respected oracles that the market is "too high." There will be frightening drops and stomach-churning volatility.

    But as long as there is fuel for the market, the fire will continue. And, of course, money is fuel for the stock market.

    And that's the irony. If the Fed stops creating the fuel, the economic fire -- as well as the bull market inferno -- will smolder into embers. That's what almost happened two weeks ago, when the Fed said it was inclined to dial back on money creation, because it seemed the economic fires were ignited enough to continue on their own.

    Only when Fed Chairman Bernanke "clarified" his remarks in an unexpected commentary, did the market start rising again.

    In my column posted several weeks before those events, I said you could count on the Fed erring on the side of easy money. No Fed chairman, or board member, wants to take the blame for creating another economic slowdown.

    I have no crystal ball as to how it will end, but likely it will not end well. Perhaps it will take the next Fed chairman to clamp down. Or perhaps the next Fed chairman will be even more accommodating, fearful of destroying the economy and markets. Only time will tell.

    In the meantime, if you panic and exit, you lose all the potential for upside on your investments. And that's the reason to stick with a long-term investment plan with a specific portion of your assets -- and re-balance (take some money off the table) after making gains. But it's also the reason you don't sell everything in a panic.

    The simple point to be made is that if you don't want to be constantly adjusting stock positions or choosing sector funds, the best long-term strategy is to set a balance between a diversified portfolio of stock market investments and "chicken money" -- safe, but very low-yielding CDs and money markets.

    The balance is different for everyone, but it's important to keep that percentage in balance by moving some, not all, gains to the safe money side of the ledger when the market rises.

    You won't make as much money with that strategy if the bull market continues beyond all expectations -- but you can sleep well at night, knowing that your chicken money is roosting in a safe place. That's the Savage Truth.