By Rick Golod
The anticipation of the Federal Reserve's (Fed) first increase to its target federal funds rate has raised considerable debate about what this could mean for the U.S. equity market. Forecasts range from violent correction to middling gains to strong bullishness, leaving investors confused about the prospects for long-term equity portfolios.
While a market correction is possible, history suggests that most of the time stocks fared relatively well.
In fact, in a recent analysis, independent research firm Cornerstone Macro found that in past Fed tightening cycles the U.S. market tended to follow the direction of the dollar.
Stocks gained in previous tightening cycles
Source: Cornerstone Macro LP, April 4, 2014. Past performance is no guarantee of future results. An investment cannot be made directly into an index.
I believe the dollar could be a good indicator to watch as we approach the Fed's first rate hike. Investors should also remember that when monetary policy calls for tightening interest rates it's typically a sign the economy is improving. A stronger economy is likely to bolster corporate earnings, and potentially stock prices.
For a more in-depth look at where I think the market is headed, view my June commentary, "Don't Fight the Central Banks."
The S&P 500® Index is an unmanaged index considered representative of the US stock market.
In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.
Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa.
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