Fed Raises Interest Rates.

For the first time in a year the Federal Reserve yesterday raised interest rates by a quarter of a percent.  You can find a pretty good overview of what they did  via Bloomberg here.   The stock market took it on the chin after the announcement yesterday, with almost anything associated with a dividend feeling the main brunt of the selling.  

I can understand this being the initial reaction.  We've had a pretty good run-up in prices since the election and an excuse for some sort of profit taking was probably needed.  As we noted Monday, the markets had basically gone parabolic in the past week.  Yesterday's sell-off hardly erased much of that gain.  In most instances it only took us back to where we were a few trading days ago.  

Longer term I'm not so sure this is a big negative for the markets and the economy.  First, as we've said many times in the past, the economy has been getting better.  Even the Wall Street Journal seems to have noticed this.  If you can get behind their paywall then go read "Surprise!  The Economy is Looking Pretty Good Right Now". To me that means a rise in interest rates is a positive as it seems to be showing the economy is doing well enough for interest rates to become more normalized.  I also think that a rise of nearly a percent over the next year might ultimately give savers a bit more in their pockets.  Probably not at banks, but bond yields may rise to a point where investors are willing to take a look at fixed income again.  If fixed income isn't on their radar now it might be a year from now if longer dated bonds show yields nearer 4%.  

Finally remember back to last year at this time.  The Federal Reserve had their first rate increase in years and indicated they could potentially raise four more times during 2016.  The market gagged and coughed up over a 10% decline before it was all over.  That was the end of the four rate increase talk for 2016.  Let's see if their actions match their words as we get into the new year.  We know last year they blinked when things got tough so let's see how resolute they are if markets or events get choppy.

Finally the market seems to be in a much better mental position to handle higher rates now then a year ago.  Maybe it's the euphoria from the elections that's hit the markets or maybe investors are finally latching onto the belief that the economy is doing better, but so far this move down is more muted than what we saw a year ago.  Surely nobody right now is calling for a repeat of last year.  

At any rate I would think if a move lower is coming then probability suggests we'll see the bulk of it in 2017.  I think it's possible investors are going to be reluctant to want to pay those taxes this year in what could be a much higher capital gains rate environment right now.  The hope for more favorable capital gains treatment from the upcoming Trump Administration will likely "Trump" fear of a more formidable correction at least this year.  Besides Wall Street is going to want to keep those gains into  year end.  Folks want to get paid!

Back Monday.