Returns in the market are expected to rise, but investors should anticipate that volatility will continue to be a norm as the Federal Reserve is predicted to raise interest rateslater this month. That is to say, though the market may ultimately trend upward before we end the calendar year, the gains will be modest.
In fact, though the market will rally in the last few weeks of the year, the Dow will close at 18,000, only a few hundred points from its current value, said Patrick Morris, CEO of New York-based HAGIN Investment Management.
“The first quarter should be good for stocks, since the Fed’s rate hike impact won't come into the numbers for a quarter or two,” he said. “I think there is a 25% chance of a recession, but there is no sign of it now.”
An interest rate hike by the Fed later in December is likely to occur but will still producevolatility in the financial markets, said Greg McBride, chief financial analyst for Bankrate, the North Palm Beach, Fla.- based financial content company. A decision to raise rates by the Fed means the economy is improving and “ultimately a better economy will be good news for the stock market and investors,” he said.
The economy is demonstrating signs of solid job growth, because the fundamentals are “decent” and a recession is not likely to occur, said McBride.
Effect of Interest Rate Hike
The ensuing rate hike later this month has already been reflected in the stock markets, said McBride. What investors should focus on is the trajectory of future rate hikes, especially how often and how much they increase, which can affect mortgage rates and credit card debt.
Since the Fed is expected to increase rates by only 0.25%, the "immediate real impact will be negligible,” said Bill DeShurko, a portfolio manager with Covestor, the online investing marketplace, and founder of 401 Advisor in Centerville, Ohio.
Raising rates are positive for the economy, because the current artificially low rates are destructive to the “real economy,” he said.
“Once we are there, we will be much better off,” DeShurko said. “The basic tenant of investing is that everything revolves around a ‘risk free rate of return’ and how much risk an investor will take to improve his return over and above that risk free rate.”
When interest rates rise for a period of time and they are normalized, the markets will see a “much more efficient allocation of capital,” because banks will be less hesitant to lend money and companies will increase their investments in capital expenditures while wages will rise and safe investments will “actually pay interest to savers," he said.
