Just the other day the Federal Reserve raised interest rates once again. They also maintained that they will shoot for three interest rate hikes next year as their goal. Of course this is flexible and is more of an assumption for now.
The Federal Reserve has a history of raising rates right into new market recessions. Another way of looking at it is that when the Federal Reserve raises interest rates it causes a recession. We can debate that another time but the question is, if the raising of rates causes lower market prices then why hasn't it happened yet? The Fed has raised rates now from 0% to 1.5% so why has the market continued higher?
Here's the thing, you, or I have never seen interest rates at 0% prior to the 2008 crisis. Previously when the Fed lowered rates it wasnt to 0%. This was a severe exception to every other time in history. When the Fed lowered rates in the past we were talking a move from double digits to single digits, not to 0%.
So, when it came time to raise rates again it really slowed down the credit markets. This time a rate hike from 0.25% to say 0.75% doesn't really hurt anyone, BUT there will come a point where it does. So what is the magic number that begins to put pressure on the markets?
Well, one other thing to consider is the stock markets impressive returns. Why on earth would someone take money out of the stock market which is yielding double digits, and put it in a bond market for 1.5%? They wouldnt, and they haven't. At some point it would be worth it to reduce stock market risk and get into bonds and analysts mostly agree that this is when rates return to somewhere in the 3% range.
At 3% or more it starts to make some sense to move a little money to the bond market, especially for older investors. Now a little market risk, and some bond risk makes sense again for the first time in over a decade.