Here’s a fun fact worth sharing: January, 2015 economic data shows that for the first time ever, Americans spent more money eating in restaurants than buying their food from grocery stores. The difference was close. Americans spent $50.475 billion in January between restaurants and bars, and $50.466 billion in grocery stores. Stay with me as I carry this a little further. This fun fact lends to the notion that our economy is showing strength. With gas prices and unemployment both at 6 year lows, Americans have more discretionary income to spend. That’s good, right? And what does a stronger economy mean to the consumer?
In this example, it means we’re enjoying more meals out than those prepared at home. It’s a luxury. But then our minds begin to drift towards what’s next for the economy. Do you wonder about the Feds making good on their promise to start increasing short-term interest rates? An increase in interest rates would tighten our ability to borrow; and less borrowing means less spending. Is this bad for a strengthening economy? This is beginning to sound like the book, “If you give a mouse a cookie.” It’s a domino effect of consequences.
Before you answer that last question, think about what you’d consider “normal” as it relates to our economy. There’s one thing we can agree on and that is interest rates stuck at zero is not normal. Perhaps a range between 2-5% is normal. A rise in rates would mean interest payments for cash held at banks would return to what we used to see, and fixed income investments would begin to earn a more normal rate of interest. We’d also see a return to more normal rates of inflation. Now let’s shift this consideration to stocks for a moment. Do you fear what an increase in rates will do to the stock market?
Let’s see if this helps ease your fear. Historical data of the S&P500 showed average gains of 9.6% year over year from when interest rates bottomed through to their peak – these dates ranged from 1958-2007. This data suggests that a rise or fall in interest rates would have minimal impact on the stock market, so fear should remain in check.
And finally, what you can consider normal for the stock market is consistent expansion and contraction. A rise in interest rates may cause some initial contraction but the overall picture still remains positive. So while we’d like to see stocks continue their rally upward with the markets hitting new all-time highs month after month, a return to normal is not a matter of “if,” it’s a matter of “when.” Let’s be ready.