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OPINION

Facts, Not Myths Of Rate-Hike Risk

The opinions expressed by columnists are their own and do not necessarily represent the views of Townhall.com.
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Let’s talk about what happens to the stock market when the Federal Reserve begins to hike interest rates. For a long time, investors were told that the announcement of the end of Quantitative Easing (QE) would trigger a collapse in stocks. Next, it was the start of ratcheting down QE, and as dumb as it sounds, there was a lot of noise that the last $3.5 billion would do the trick of opening a trapdoor.

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None of this has happened. Surely, the rate hike will spark the mother of all crashes, right?

The doomsday crowd has been so wrong, but they still get on soapboxes and they use frustration with government and the economy to promote an inevitable day of reckoning. It is not unlike me predicting that Boston will see a massive blizzard in January or February of 2016. Of course, that should not stop anyone from visiting beforehand and it does not mean all the snow in the world will not be cleaned up afterwards.

Yes, there are issues and the market will take a hit one day, and it could happen from a Fed rate hike, but here's a look at the history, not the hype.

In the months before the Fed began hiking rates, stocks began to pullback, going into that first rate hike as gains are pared from six months out to just three months before. This has happened six months before every previous rate hike.

Federal Reserve Rate Hike
S&P Performance Before
6 Months3 Months
19879.77.3
19944.72.7
199715.15.1
199911.45.5
20042.81.2
Average8.74.4

Then the market gets hit, although the tailspin has lessened since the 1987 round of rate hikes began. Moreover, these losses eased over the next six months and the last three times the market went up nicely.

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Federal Reserve Rate Hike
S&P Performance After
3 Months6 Months
1987-29.3-15
1994-3.9-2.4
199712.718.9
1999-6.66.7
2004-2.36.4
Average-5.9-2.9

Here's the Price Earnings (PE) history when hikes begin, and it is important to know that the S&P is nowhere near recent valuation levels for the Fed to move. (I really wish they would get it out of the way, however.)

Federal Reserve Rate Hike
PE Ratio
198720.0
199421.5
199719.6
199933.5
200420.3
Average23.0

Here's the rub, the S&P average gains of +8.7% goes all the way down to -5.9% over a nine-month period; that's when people make big mistakes and take big losses. This time, the doomsday crowd will be barking.

I can only hope we have a fair amount of cash and have earned your trust to the point we can ride the volatility in the market. If it’s really awful, it’s not the end, but it is the beginning of big things and opportunities. As for the Fed making that move, I do not think our economy is where they feel confident. Maybe it will reach it by the end of the year, but the fact is that the economy will never come close to its full potential under this administration.

Riding out the Waves

I have always said that I regret 85-90% of the sells I make at some point down the road. There is an amazing argument to buying, holding, and adding on dips rather than taking losses. Take a look at the hottest stocks from 2000 to the end of last year. Have you ever owned and taken a small profit or worse, suffered a loss on the stocks below? Most have been hot stocks this year.

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I get that people are afraid, but gosh, the evidence for not panicking is so overwhelming. Yet, I know I will have my hands full once we hit a rough patch.

CompanySymbol% change since 2000
Monster BeverageMSNT46,514%
Keurig Green Mtn.GMCR31,124%
Tractor SupplyTSCO7932%
Gilead SciencesGILD4539%
O’Reilly AutomotiveORLY4084%

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