The Federal Reserve and Interest Rates

[Sid888]

What's likely to happen when interest rates start to go up?  I'm about 25% cash in my retirement account and ready to invest it.  I'm mostly in low fee Vanguard market funds (US, Europe and Asia) and a high dividend ETF.  Should I wait for rate hikes to happen or just keep putting in my usual amounts over the next few months?  I have been trying to buy at dips over the last year and it has worked out just fine.  I'm think interest rate hikes will create another dip and another buying opportunity.

[FIRE47]

No one here really advocates market timing, although it does seem like putting it in now is trying to swim against the current. The problem is in the short term it could just as easily go up and in the long-term rates could be rising for several years if current theory holds true -  so trying to find the perfect time will be hard.

[matchewed]

Come up with an Investment Policy Statement. Invest as it states regardless of the Fed, interest rates, or whether it's going to rain tomorrow.
Link.

Also stop trying to buy on dips and just invest with simple DCA every time you can.

[webcat86]

People have been expecting a rate rise since shortly after rates went down. There are people who have held off buying a house because "the big crash is imminent." All that's happened is they've lost the low prices and either have to buy higher or continue waiting - another crash will happen one day, rates will rise one day. No one knows when

[Sid888]

No one here really advocates market timing, although it does seem like putting it in now is trying to swim against the current. The problem is in the short term it could just as easily go up and in the long-term rates could be rising for several years if current theory holds true -  so trying to find the perfect time will be hard.

I generally agree with this advice but thinking about bending the rules now because an interest rate hike really seems imminent in 2016 and I'm already 75% in the market.

Are we all in agreement that a rate hike will cause a market dip?

[matchewed]

No one here really advocates market timing, although it does seem like putting it in now is trying to swim against the current. The problem is in the short term it could just as easily go up and in the long-term rates could be rising for several years if current theory holds true -  so trying to find the perfect time will be hard.

I generally agree with this advice but thinking about bending the rules now because an interest rate hike really seems imminent in 2016 and I'm already 75% in the market.

Are we all in agreement that a rate hike will cause a market dip?

No. It may but you should not give a shit and should invest as a long term investor not a short term speculator.

[webcat86]

No one here really advocates market timing, although it does seem like putting it in now is trying to swim against the current. The problem is in the short term it could just as easily go up and in the long-term rates could be rising for several years if current theory holds true -  so trying to find the perfect time will be hard.

I generally agree with this advice but thinking about bending the rules now because an interest rate hike really seems imminent in 2016 and I'm already 75% in the market.

Are we all in agreement that a rate hike will cause a market dip?

Not necessarily. Any rate rise will be gradual, probably .25%. There may be a small dip, I wouldn't expect anything too substantial and it doesn't matter if you invest each month anyway.

Ultimately you are trying to time the market. A rate hike "seemed really imminent" in 2015. Heck I remember desperately wanting to buy a house before this time last year because a rise was DEFINITE in October. Alas, October came and went. The rate rise has been "just around the corner" for years.

[Indexer]

2009: People told me rates had to go back up... they went down.
2010: People told me rates had to go back up....
2011...
2012...
2013: OMG the fed ended QE. RATES HAVE TO GO UP NOW RIGHT? [Bond funds take a hit in the 4th quarter because of the assumption rates HAD TO GO UP.]
2014: And rates went DOWN.

Predicting interest rates has about the same success rate as predicting stock market returns.

You are trying to figure out how predicting interest rates will effect predicting stock market returns. I estimate your chances of being right and timing it right at about 0.1%. I estimate your chances if it was 100% luck without even reading the news to be about 0.1%. This isn't a dig at the OP, its a dig at trying to predict any of this in the short term.

[LAGuy]

It could be that a rate rise will cause the market to rally, especially if foks think future interest rate hikes are off the table. A lot of the current volatility can be explained by folks unsure of what the Fed will do. In the end, I agree with those that say that 0.25 is such a pittance it shouldn't (and won't) matter one way or the other. You shouldn't be making a decision to buy stocks based on what you think the Fed is going to do.

[nobodyspecial]

Are we all in agreement that a rate hike will cause a market dip?

Unless most institutional investor in the market also think there will be an interest rate increase and have factored that into the current market price

[Frugal D]

Yeah, just keep buying. Trying to time the market will give you a heart attack.

That said, the Fed is not raising in December and probably won't for many years.

[mrpercentage]

Sid if you are 25% cash I would begin to dollar-cost-average that into REITS. Thats my personal plan. REITS are interest rate sensitive and so are utilities. As the market begins to price in the rate hikes you will want to start purchasing one of those two for a lifetime hold. Both produce massive dividends and when they are going down is a great time for a lifetime purchases. Cheers

[aspiringnomad]

Actual inflation still below target. 10-year expected inflation still extremely low. Labor rate participation still declining. Wages still relatively stagnant. It's fair to expect a small move in the fed funds rate soon but no moves that would have a major effect on the real economy.  As for a minor market tantrum, sure maybe, but if you were lucky enough to invest a lump sum in the S&P just before the 2013 "taper tantrum" you'd be up 32% with dividends reinvested right now.

[gillstone]

Don't time to the Fed rate change for 3 reasons:

1) In anticipation of a rate change the market will move rates along on its own to soften he impact of a 25 basis point hike.  Anything bought a month before an expected hike will already be 10-20 basis points higher because of the expectation of a hike.

2) Expectation and actuality are two very different things.  Rate hikes were considered a better than 50% change 6 weeks prior to the March, June and September meetings and yet here we are with no hike. 

3) There are other ways the Fed could play with rates without doing a 25 basis point jump like not buying bonds to replace ones in the portfolio that have matured or by shifting the balance between long term and short term maturities.  These are ways to tweak the market and can impact it without the big neon sign of a rate hike. 

Trying to time and predict is a losing game when working in macroeconomic policy

[Mr. Green]

There has been no indication by anyone that the Fed will raise rates beyond 0.25% in the near future and and discussing a quarter of a point's real impact (not fear driven) on the market is the equivalent of taking all those seconds (or minutes) of your life, crumpling them up in a ball, and doing a office-chair-Jordan slam dunk into the nearest trash can, because there will be no impact IMO.

[seattlecyclone]

Are we all in agreement that a rate hike will cause a market dip?

Nope. A certain amount of rate increase is already being anticipated by the average market participant and is thus priced into basically everything at this point. What matters here is not whether rates rise or fall, but how the actual change in rates compares to the change that the market is currently expecting.

It's sort of like how a stock's performance the day after an earnings report doesn't really correspond to whether the company announced a profit or a loss; instead the performance depends on how the announced profit or loss compared to what the analysts and other market participants were predicting. If the company announced better than predicted results, the stock will go up. If they announced worse than predicted results, the stock will go down.

[Mr. Green]

Are we all in agreement that a rate hike will cause a market dip?

Nope. A certain amount of rate increase is already being anticipated by the average market participant and is thus priced into basically everything at this point. What matters here is not whether rates rise or fall, but how the actual change in rates compares to the change that the market is currently expecting.

It's sort of like how a stock's performance the day after an earnings report doesn't really correspond to whether the company announced a profit or a loss; instead the performance depends on how the announced profit or loss compared to what the analysts and other market participants were predicting. If the company announced better than predicted results, the stock will go up. If they announced worse than predicted results, the stock will go down.

+1

[doggyfizzle]

I posted these charts in another thread the other day, but the common narrative "when the Fed raises interest rates stocks fall and the sky collapses..." doesn't really hold much water.  Concern about stock market performance during the next tightening cycle should not discourage you to continue to invest the remaining 25% cash position in your portfolio.

[mrpercentage]

It could be that a rate rise will cause the market to rally, especially if foks think future interest rate hikes are off the table. A lot of the current volatility can be explained by folks unsure of what the Fed will do. In the end, I agree with those that say that 0.25 is such a pittance it shouldn't (and won't) matter one way or the other. You shouldn't be making a decision to buy stocks based on what you think the Fed is going to do.

I agree, also, if rates go up it signals confidence in the economy, which could cause a market rally.  However, REITS and Long Term Bonds are not the place to be right now and I'd reduce my exposure to them.

REITS are for collecting dividends. I don't plan on selling them ever. Crap happens buts it's not part of my plan.

[Sid888]

I posted these charts in another thread the other day, but the common narrative "when the Fed raises interest rates stocks fall and the sky collapses..." doesn't really hold much water.  Concern about stock market performance during the next tightening cycle should not discourage you to continue to invest the remaining 25% cash position in your portfolio.

Thank you (and everyone) for taking the time to provide me advice.  I guess I'm also looking at the first interest rate hike as a "return to normalcy" in US monetary policy and the beginning of the end of a recession driven policy.  Somehow, waiting until the first rate hike seemed like a safe point to go from 75% invested to 100% even if it's not entirely rational and even violated my own investing plan.  It's good to know that much interest rate hike pricing is already occurring or has occurred.

[Sid888]

Sid if you are 25% cash I would begin to dollar-cost-average that into REITS. Thats my personal plan. REITS are interest rate sensitive and so are utilities. As the market begins to price in the rate hikes you will want to start purchasing one of those two for a lifetime hold. Both produce massive dividends and when they are going down is a great time for a lifetime purchases. Cheers

I think my high dividend ETF has some REITS and utilities.  I should probably know it but alas, I do not.  Thanks for the advice.  I'm just now seeing the light in dividend investing.

[Jack]

Are we all in agreement that a rate hike will cause a market dip?

Yes. And that very fact is why it won't happen!

We'll all try to buy the dip, which will increase demand, which will cause the dip to evaporate.

Will the dip exceed the increase in demand, causing a net decrease in prices? Or will the demand increase beyond the magnitude of the dip itself, causing a net increase in prices? Nobody knows! And that's why market-timing is doomed to failure.