SIZING UP STRESS POINTS
STOCK PROS SHRUG OFF FED’S LATEST RATE HIKE BUT NOTE POTENTIAL DISTRESS SIGNALS
Stocks have kept climbing despite a new period of rising interest rates engineered by the Federal Reserve. But at some point, higher borrowing costs for consumers and businesses will drag on the 8- year- old bull market and worry the people who manage money for a living.
The U. S. central bank on Wednesday raised its key shortterm rate by a quarter- percentage point to a range of 0.75% to 1.00%. It was the second hike in three months and third since December 2015. The Fed is trying to return rates to its preferred level of 3%, which it estimated could be reached by the end of 2019. It had kept them near 0% for about a decade to stimulate the economy
“Four rate hikes ( this year) are not completely dead.” Christopher Rupkey, chief economist at MUFG Union Bank
after the recession sparked by the financial crisis.
Before the recent flurry of increases, those low rates had also been a key driver of a long bull run, pushing the Dow up 220% over the past eight years. Since the Fed’s first hike in late 2015, the Dow is up about 18%, and it has risen 5.5% since its second hike in December 2016.
Wednesday, Wall Street shrugged at yet another sign the Era of Zero is over. The Dow Jones industrial average rose more than 100 points after the Fed’s hike. Investors initially had latched on to Fed Chair Janet Yellen’s upbeat assessment of the U. S. economy and her continued emphasis on a gradual pace of increases. Yellen said she still expected to raise rates three times this year. That reassured investors, who had feared the Fed might be more aggressive and plan to increase rates four times as a way to control rising costs.
Now, money managers are watching for signs, or stress points, that could signal the rate hike cycle is becoming a problem for stocks.
Three things that could spook investment pros:
1 10- year Treasury note topping
3%: The Fed has influence over rates on all kinds of consumer and corporate debt, thanks to its control of its funds rate — the interest banks charge each other for overnight loans. But investors in international markets drive longer- term rates, such as those on the 10- year Treasury note. Stocks often get knocked off track, and seem less attractive, when yields on longer- term bonds go up. In general, higher rates eventually slow the economy, dent consumer spending and raise loan costs for borrowers.
Currently, the 10- year Treasury yields around 2.50%, nearly double its 52week low of 1.32% in July, but lower than the 2.64% rate after the December rate increase.
Market pros say a key threshold they’re watching is a yield of 3% or more, a level not seen in more than three years. A rise to 3.25% to 3.5% would cause more jitters.
At that level, stocks could suffer harm and bigger price swings could happen more often. 2 Fed speeding up hikes: Yellen said Wednesday the Fed was still on track for three rate increases this year. But market pros say stocks could get upended if the Fed ups its count. “Four rate hikes are not completely dead,” says Christopher Rupkey, chief economist at MUFG Union Bank. Another potential shock: The Fed surprises investors by hiking rates by a biggerthan- expected amount. 3 Economy picking up too fast: Too much of a good thing could spur the Fed to get more aggressive than investors want. The risk is if the Fed has to transition to a much faster pace of rate increases to keep the economy from overheating. This could occur if the fiscal stimulus introduced by President Trump, at a time when the economy is near full employment, provides a big lift to growth and causes inflation to rise faster than expected. That would spark fear the Fed might be too late in keeping inflation at bay, which could force it to hike rates more than planned.
What the market won’t like is if the Fed “is behind” where it needs to be on its rate hike schedule to keep inflation in check.