Taken from Zacks, 3/9/2015
Steve Reitmeister, Executive Vice President
Stocks went -1.4% lower Friday based upon this equation:
Stronger employment #s = the sooner the Fed raises rates =
higher bond rates = lower valuation for stocks.
Is it truly that simple? No it's a bit more complicated than
that. Let me break it down for you.
Yes, the Fed is now more likely to start raising rates this
year. This should be considered as a merit badge for the US economy that it has
rebounded well enough to not need so much accommodation. In fact, the stock
market typically keeps rising for 2-3 years after the Fed starts raising rates.
Bond investors took notice and pushed up US 10 year Treasury
rates from 2.11% to 2.24% Friday. That is a BIG one day move in the bond world.
However, how much higher will bond rates go with Europe on the QE bandwagon
where German 10 year rates are at 0.4% and sub-prime nations like Italy and
Spain are both around 1.3%?
The spread between the US and Germany is much wider than
historic norms. And most CERTAINLY rates for Italy and Spain should not be
lower than the US given their anemic economic status. As such, I expect demand
to markedly increase for US Treasuries. This should keep rates in check and
would be surprised to see them venture that far north of 2.5% this year (which
was the average in 2014).
To sum up, I am not fearful of a Fed rate hike as that is
typically good for stocks given that it means the economy is in good shape and
stocks stay on the uptick for 2-3 years after. And I believe that worldwide
government bond competition will lead more investors to US Treasuries to keep a
lid on rates and thus continue to make stocks look attractive by comparison.
Remember that rates moved up to 3% in 2013 and yet still the S&P rose 32%
on the year.
My view of the investment world may not have been the same
one adopted by other investors on Friday. Yet when level heads prevail I think
that more people will come around to this same understanding. As such, I
believe that this is a buyable dip with higher highs on the way this year.
Taken from Zacks,
Steve Reitmeister, Executive Vice President
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