The common consensus has been that a Federal Reserve rate hike will cause U.S. stock prices to drop and stay that way for way while, but there are some contrarians out there that think otherwise. Burt White, the chief investment officer at LPL Financial, argues that a rate hike is a good thing for stocks. His argument is quite compelling. At the beginning of 2014, the economy was in a similar situation as it is now, and the Fed even had a less than favorable outlook for the rest of the year. White believes that the same thing will happen in 2015. The beginning of the year has been less than stellar in many areas, but there are reasons to believe that the end of the year will see a rebound.
Regardless of what happens over the long term, right now, things are uncertain. It makes investing and even position trading an uncertain factor in your life. In fact, the only thing that we can predict with a high degree of accuracy right now is what will happen over the next couple days. It has opened up a ton of new chances for short term traders, especially for small traders if they decide to use tools like binary options where they can trade with little risk and small amounts of money. With things like indices like the S&P 500 and the Dow Jones, this becomes an attractive trading choice as they are not easily approachable to the average trader elsewhere.
In the end, White is probably right. At least in part, and perhaps not in the way that he intended to be. The rate hike may have an immediate impact that seems negative at first as prices will likely drop, but overall, the companies that are hurt the most will be the ones that deserve to be hurt because of poor fundamentals. These are the companies that are seeing out of character growth right now, and it is far beyond what they can support if left to their own devices. In this sense, a temporary rate crunch will weed out the companies that are artificially strong right now. This is one more reason why even short term traders that rely heavily on technical indicators and trading the news should have a basic foundation of understanding when it comes to the fundamental indicators that show a company’s health.
While the low interest rates that the ed has had for the last several years have been good for the economy, they cannot last forever. It has created a lot of opportunity for companies, and many have gone above and beyond what was expected of them because of the easier access to cash. Now that these companies have established themselves, they should be fine once the rates go back up. Other companies will not be as lucky. This is just a part of how the market works, though. Companies come and go all the time while the strong ones rise to the top and keep moving forward. Now that there are many new companies up at the top, it seems like it is a bit safer for the Fed to raise rates without harming the economy. While long term investors attempt to find the companies that will be around ten and twenty years from now, short term investors have many more choices to sift through. Finding a company that will quadruple in price in a year is a good thing, but if that company is gone in another year afterward, the smart investor has already exited the position and realized their profits.