Why the Fed raising rates in September could help your stocks. Part two.

Is it over yet

Peter Tchir from Brean Capital just wrote a note to his clients that put everyone in a tizzy. He believes that the Fed should increase short-term rates in September regardless that the markets are in full fledged implosion mode.

To get everyone up to speed, that last decline you see in this chart below shows you what the Fed has done to short-term interest rates since mid 2007.  The goal of low short-term interest rates was to boost the economy and stock prices coming out of the recession.

Do you like zero interest? Didn't think so

The cat is out of the bag that the Fed’s low interest rate policy did more of the latter than the former. Meaning, until this recent stock market hemorrhage, U.S. stock have been ripping since 2009, while the U.S. economy has been showing modest signs of improvement, but nothing off the charts.

So up until the last few weeks, everyone has been assuming the Fed will increase short-term rates in September. Why? Everything was “ok,” kind of, so it’s time to move back toward normal short-term interest rate levels of 2 – 2.5%.

But now that stocks around the globe are free falling faster than Tom Petty (oh my god), the short-term rate increase bet is off. Higher rates will “undoubtedly” be even worse for stocks (with higher rates, fewer people will borrow and spend money), so the Fed absolutely should not raise short-term interest rates.

Not so fast

I am definitely a rip the bandaid off sort of girl, so I agree with Tchir’s point that some certainty with interest rates could create a sense of calm, and actually be good for stocks, rather than this continual “we’re in we’re out” message the Fed is giving us.

That aside, why is everyone so afraid of an interest rate increase? It makes zero sense.

Morgan Housel and Ben Carlson point out via the WSJ: “The average annual return for the S&P 500 during all 14 periods (when rates bottomed out to their peak) was 9.6%, including dividends.”

Don't fight it

Ok. So you could say that an increase in short-term rates during a correction (right now) is a different scenario than each of the above. Fine. But the market likes certainty and hates uncertainty. So if we need to get from A to B with short-term rates, and uncertainty in the markets is off the charts right now, why not provide the markets with a little certainty love?

We need to return to normal

I wrote about why the Fed raising interest rates is not bad a few months ago: we need to get back to “normal.” Do you like earning zero interest on cash you have parked at the bank? Do you like earning piddly interest rates on your short-term bonds? Do you like not knowing when this will change?

The bottom line is we can’t have it both ways. Do you want “normal” inflation, interest rates, unemployment, and P/Es? Or do you want stocks to fall then probably rally up to space on the back of another QE and corporate buybacks fueled by low interest rates?

Don’t answer that.

The latter is great until your stimulus beer goggles wear off and you’re in bed with Stifler’s mom and not entirely sure what just happened.