Home' Trinidad and Tobago Guardian : September 28th 2014 Contents SEPTEMBER 28 • 2014 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
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Further fodder for Fed haters is the fact that this
period of rapidly increasing rates to combat high
inflation coincided with the end of Americans ability
to convert dollars to gold and the dawn of the fiat
I don t read too much into this unique period of
rapidly rising rates as it would relate to current cir-
cumstances, but it s worth offering up for balance.
After stagflation in the early 1970s started to abate,
the Federal Reserve moved rates back down later in
the decade to a low of 4.6 per cent in January 1977.
Interest rates would march steadily higher to 17.6 per
cent in April 1980, before they saw-toothed between
a low of 9.0 per cent in July 1980 and highs of 19.1
per cent in both January and June 1981.
The annual performance of the S&P during that
•1977: The S&P lost 7.0 per cent
•1978: The S&P gained 6.5 per cent
•1979: The S&P gained 18.58
•1980: The S&P gained 31.7 per cent
•1981: The S&P lost 4.0 per cent
It s worth noting the big year of 1980 also coincided
with a few brief periods of lower rates, however, there
were only three months out of the entire year that
the fed funds rates was less than double digits. That
shows even record highs for interest rates couldn t
stop the rally for stocks.
And once again, the weakest periods are at the
beginning or the end of rate tightening. See graph
Rates briefly and modestly increased during part
of 1983-1984 before resuming their downward march,
so I ll skip this period. And for the record, the S&P
was up 22.3 per cent in 1983 and 6.15 per cent in
1984 --- just so you don t accuse me of cherry-picking
to avoid a bad run for stocks.
Anyway, the more sustained period of rate increases
was from October 1986 when the fed funds rate bot-
tomed at 5.8 per cent and jumped to 9.8 per cent
through May 1989. Here are the annual returns for
•1986: The S&P gained 18.5 per cent
•1987: The S&P gained 5.8 per cent
•1988: The S&P gained 16.5 per cent
•1989: The S&P gained 31.5 per cent
After peaking in 1989, rates fell non-stop until
1992 before they basically moved sideways for another
After staying at or around 3.0 per cent across 1993,
the Fed bumped rates to 3.3 per cent in February
1994 and didn t stop until interest rates had doubled
to 6.0 per cent through June 1995.
The S&P rose only 1.3 per cent in 1994, but 1995
was one of the best years on record, with a whopping
37.2 per cent jump for the benchmark index.
Rates bottomed at 4.6 per cent in January 1999,
marking an almost five-year low dating back to the
previous period of rate increases, before moving up
modestly to 6.5 per cent through October 2000.
Granted, 22 months isn t a long stretch. But over
the past 15 years, this is one of the few periods of
moderately rising rates and should be included for
its relevance to the modern high-tech stock market,
if nothing else.
The S&P jumped from around 1,230 to around
1,400 at the end of October 2000, for a 14 per cent
run in that period.
The dot-com bubble had actually already started
to burst by October 2000. But while rates were rising,
at least, stocks were, too, in this brief period.
In fact, calendar 1999 enjoyed 20.9 per cent returns.
The last time rates were on the rise was from 2004
to 2007, from a low of 1.0 per cent in June 2004 to
a high of 5.3 per cent through July 2007.
Returns by year are:
•2004: The S&P gained 10.7
•2005: The S&P gained 4.8 per cent
•2006: The S&P gained 15.6 per cent
•2007: The S&P gained 5.5 per cent
All in all, the S&P 500 rose from about 1,120 at
the beginning of June 2004 to 1,470 at the end of
July 2007, a 31 per cent gain.
Once again, you d have to time this perfectly to
get out before the music stopped, because we all
know the market peaked in October 2007 before the
financial crisis began to rear its ugly head.
But the fact remains that as rates were steadily
rising, so were stocks from 2004 through 2007.
By all reports, the Federal Reserve will follow a
similar path to this 2004-2007 period in the years
And if it does, with consistent and reliable increases
in interest rates, there seems to be no reason to expect
stocks to slump.
Jeff Reeves for Market Watch
Interest-rate information and charts from St
Louis Federal Reserve data. Historical stock market
returns from the NYU Stern School of Business
and Yahoo! Finance data
Timing the market:
NO EASY TASK
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