With the start of the new tightening cycle, the Federal Open Market Committee ended a seven-year period of zero rates.
“This is a big event (maybe not ‘Star Wars’ big, but big) because of how long zero rates have been in place,” said LPL Financial (LPLA) Chief Investment Officer Burt White in an economic commentary piece he leased Tuesday.
Advisors and investors should view the Fed’s decision “as a vote of confidence,” according to White.
“We saw the alternative in September when the Fed surprised markets by not raising rates, citing risks overseas, and stocks fell because market participants wondered what the Fed knew that they didn’t,” he explained.
Expect bumps ahead, as rate hikes reaffirm that the economy has passed the midpoint of its current cycle, “a stage that may bring additional market volatility,” White says. “We especially anticipate it in the coming weeks and months, as investors adjust to the start of a new era of U.S. monetary policy. Historically, while stocks have risen in the year after the Fed starts hiking rates, performance has been mixed during the first three months.”
Gradually rising rates should help support stock market valuations, according to LPL’s CIO: “Stock valuations are partly a function of market interest rates, which are partly a function of the level and trajectory of the federal funds rate controlled by the Fed (growth and inflation also play key roles). Interest rates reflect the level of competition bonds provide for stocks, and a gradual pace of hikes suggests that the weak competitive threat bonds currently present for stocks is unlikely to get much stronger anytime soon.”
What Else to Expect in ’16
The start of monetary policy “normalization” does not change LPL’s stock market outlook.
“We continue to expect mid-single-digit gains for the S&P 500 (based on total returns) in 2016 and will hopefully eke out a couple more points over the remaining weeks of 2015,” White explained.
The broker-dealer’s investment team favors stocks over bonds, large-caps over small, growth over value, and domestic equities over foreign shares. Its favorite sectors are health care, industrials and technology.