To almost no one’s surprise, the Federal Reserve said Wed. it would raise short-term interest rates by a quarter percentage point. The Fed added that it planned to continue raising rates moving forward.
It’s all part of an overall plan to acknowledge and support that the Fed sees as an improving economy. The agency also indicated it would raise rates at least twice during the rest of the year.
The Stock Market Smiles
Following the announcement by the Fed, Wall Street sent prices of stocks and bonds higher. The Dow Jones industrial average rose 112.73 points. Meanwhile the yield on the benchmark 10-year U.S. Treasury note fell to 2.500% from 2.595%, the largest single day drop since June.
All this came about as the result of a 9-1 vote in favor of the rate hike by the Fed’s policy committee. The central bank has resister raising rates, last raising them in December by a quarter point to a range between 0.5% and 0.75%.
What May Happen Next
A quarter point rate hike is not a lot. If the small hikes continue, however, the effect can be significant. For example, savings accounts will eventually start to pay higher interest rates. It will take time. Since mortgage rates are tied to the 10-year U.S. Treasury bond, the fact bond rates are rising means mortgage rates will be going up.
Many analysts believe the current Trump market rally is not likely to stumble as a result of the Fed’s most recent rate hike. The combination of Trump’s promises regarding infrastructure spending, lower corporate tax rates and other business-friendly moves should keep the markets from becoming skittish, according to these experts.
History Says Otherwise
Historically, the stock market wobbles after the third rate hike in a cycle. Nautilus Investment Research's Tom Leveroni and Shourui Tian recalled the familiar Wall Street adage, ‘3 Steps and a Stumble,’ a reference to just such an occurrence.
The overall impact of a Fed rate hike is different based on the sector. Banks receive higher compensation for lending when rates are higher. Companies that produce discretionary goods, however, have higher borrowing costs making it more difficult for them to compete.
Related: THE STATE OF OIL IN 2017 AND BEYOND
Stocks To WatchRealizing that every cycle is different, there are some stocks or types of stocks that should perform better in a rate hike environment and some expected to do worse.
Companies that do most of their business in the U.S. should do better because locally made products are more attractive due to a stronger U.S. dollar. Conversely, companies that do a lot of business internationally may perform poorly or at least worse than their U.S. only counterparts. Companies like Microsoft Corp. (NASDAQ:MSFTB), The Hershey Co (NYSE:HSYD), Caterpillar Inc. (NYSE:CATC) and Johnson & Johnson (NYSE:JNJC) fall into that category.