Bull market for stocks keeps on going in 2014

31 Dec 2014 | Author: | No comments yet »

Rising Rates Aren’t Poison for Stocks.

Many investors are anxious about the impact on shares when the Federal Reserve, under Chairwoman Janet Yellen, starts boosting interest rates. Stocks pushed higher on the final trading day of the year, capping another strong year for stocks that puts the Dow on track to post its sixth consecutive year of gains.Wednesday, 14:30 GMT: The S&P 500 is heading back towards its record high at the start of the last session of what has been a stellar year for US equities, after European indices headed up off their October lows and cut their overall losses for 2014. The Wall Street benchmark is up 0.1 per cent at 2,082.20 turning around from its 0.4 per cent fall on Tuesday and putting it back within touching distance of its best-ever closing reading of 2,090.57 reached on Monday.

The Fed’s easy-money policies have helped support the nearly six-year bull market, but a rate increase could damp economic growth and make it more expensive for companies to expand. Stocks shrugged off an early report from the Labor Department showing jobless claims rose by more than expected, up 17,000 to 298,000 in the week ended Dec. 27. The extended period of cheap money, coinciding with a strong economic rebound and contained inflation, has sparked a bull-run in equities at the same time as a sustained dollar rally over 2014.

The benchmark overcame five separate declines of 4 percent or more in 2014, while stocks have never once declined more than three straight times, a first in data compiled by Bloomberg going back to 2000. Separate data showed contracts to purchase previously owned homes rose in November as employment gains and low borrowing costs helped bring potential buyers into the market. The rise trims the main UK index’s loss for the year to 1.5 per cent, but also lifts it 5.8 per cent off its closing low for the year reached in October. The nadir came at the height of concern about the potential spread of the Ebola virus, and coincided with weak European economic data that cast doubt on Germany’s ability to continue powering the eurozone economy. Morgan Private Bank, said a slow-and-steady approach to raising rates shouldn’t diminish the appeal for U.S. stocks. “It’s fundamentally good because it means that the Fed is removing this extraordinary easing and they’re only doing that because they feel that the economy is able to generate self-sustaining growth,” he said. “That will be good for corporate earnings,” he added.

Northern Trust, a Chicago-based firm that manages more than $900 billion in assets, measured stock returns from six months before to six months after the Fed’s first announcement of a rate rise. Utility shares jumped 27 percent, the largest advance, while a rout in oil prices has sent a gauge of energy companies down 9.3 percent this year, the most since 2008.

Despite that, the mainland Chinese equities benchmark remains at about half the level it reached before the financial crisis and remains beneath its 2009 post-crisis high. Brent crude, the international oil benchmark, is 2.4 per cent weaker at $56.49 a barrel, with pressure coming from further signs of a slowdown in China’s manufacturing sector.

On average, when the Fed raised interest rates by a quarter of a percentage point—a common move—stocks fell slightly in the following week, but returns were positive after one month and three months, the firm found. To understand why stocks can thrive at such times, think of low interest rates as medicine for the economy: You take it away only when the patient is healthy. The final reading of the HSBC Manufacturing Purchasing Managers’ Index fell to a final reading of 49.6 in December from 50 in November, indicating a contraction in activity. It would still take a brave man to try and catch this particular falling knife though, given how sanguine Saudi Arabia appears to be about recent drops in the oil price, which would seem to suggest we could see further losses towards the lows seen a few years ago near $40 a barrel.”

Those factors may be more than enough to push stocks higher when interest rates start going up. “The Fed just starting to raise interest rates isn’t associated with ending market rallies,” says Jeremy Siegel, a finance professor at the University of Pennsylvania’s Wharton School. To contact the editors responsible for this story: Cecile Vannucci at cvannucci1@bloomberg.net; Jeff Sutherland at jsutherlan13@bloomberg.net Jeff Sutherland

Shares of American Eagle Energy Corp. plunged 20% after announcing Wednesday that it suspended drilling operations and likely won’t resume until oil prices improve. Even an increase of a couple of percentage points would leave rates at a level that for much of the nation’s recent history would have seemed strikingly low.

The median estimates among the Fed’s 17 policy makers are for the short-term interest rate to hit 1.125% in 2015, 2.5% in 2016, and 3.625% in 2017. “Historically, it’s not until rates reach much higher levels, above 5%, until market returns have been affected on the downside,” Mr. Stocks in sectors that tend to pay investors high dividends—such as utilities and telecommunications—could get hit harder than the market as a whole by higher interest rates, Mr. Conventional wisdom suggests sectors which thrive in a growing economy could do well as rates start to rise, which could mean large manufacturers or companies that benefit from discretionary spending by consumers, such as luxury goods and airlines.

But focusing too much on those sectors could be risky because many firms already have seen their share prices rise considerably in the past six years. But rather than worrying about how Fed policy might affect the market—which you can’t control—it could be more profitable to focus on your own investing temperament, which you can.

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