The stock market recently suffered some sharp losses, showing
the kind of volatility that makes veteran traders nervous, let
alone mainstream investors. The market activity raised doubts not
only about investment portfolios, but also about the viability of
the economic recovery. And yet, through all the turmoil, there were
at least five reasons to feel reassured about recent
From May 24 to June 24, the Dow Jones Industrial Average had
nine 100-point losing days in the space of a month. Even when the
market responded with an equally steep rise the next day, as it did
on a few occasions, the effect was not exactly settling. The wild
up-and-down activity had the stomach-churning feel of an
out-of-control roller coaster.
There were plenty of reasons given from the sharp downturns --
in a skittish market, just about any excuse will do -- but the
recurring theme was worry over rising interest rates. As
speculation swirled around when the Federal Reserve would start to
cut back on its
aggressive intervention to keep rates low
, market-based interest rates like Treasury bond yields were
already starting to rise sharply.
Rising interest rates can reduce stock valuations, and under
certain conditions they can also stifle economic activity. That
explains why the stock market has been so prone to upset lately,
but at the same time there were at least five reasons to be
reassured about what is going on.
5 things to feel better about
Here are five things that should counterbalance all the gloom
and doom about
rising interest rates
Inflation has remained low.
At last look, inflation was running at just 1.4 percent annually.
It is much better when interest rates are pulled up by economic
strength than when they are pushed up by inflation.
Stock market disruptions create buying
Discriminating investors often have trouble buying in a roaring
bull market. Volatility allows you to use short-term disruptions
to capture good long-term investments at attractive prices.
Earnings are growing.
Stock prices may be down, but the underlying earnings are up and
are projected to continue to grow over the rest of this year and
for 2014. Higher earnings and lower prices add up to a value
Higher yields and bank rates help savers.
Low bond yields create serious funding problems for pension
funds, just as low savings account rates cripple the earnings
power of depositors. A return to more substantial
will restore the ability of savings to generate a respectable
amount of income.
Rising rates are triggered by economic strength.
Skittish investors seem to be ignoring the fact that the Fed
would be ending its stimulus program because the economy has
shown tangible signs of improvement. These investors have become
more focused on the stimulus than on what the stimulus is trying
To be sure, there are things to be legitimately worried about,
both for the stock market and the economy in general. However,
while the market tends to go to extremes, seeing either only the
good or the bad, a more measured approach is to acknowledge that
negative effects of rising interest rates
will be somewhat balanced by the factors above.