I see these statements every single day: “the Fed is raising interest rates, which means that stocks will crash”. Never mind the data-proven fact that stocks go up more often than they go down when interest rates rise (here and here).
Yes, it’s true that the Fed is raising interest rates.
But the absolute level (non-inflation adjusted) of interest rates means nothing. What matters is the inflation-adjusted Fed Funds rate, which is still below zero. In other words, the REAL Fed Funds rate is still negative.
As you can see in the above chart, the real Fed Funds rate always approaches 2.5% during an economic expansion. Almost no economic expansion has ended without the real Fed Funds rate approaching 2.5% during the expansion.
Only the 1975-1980 economic expansion ended without the real Fed Funds rate approaching 2.5%. That’s because although nominal interest rates were high (mid to high single digits), inflation was even higher.
Bear markets don’t start when the real Fed Funds rate is so low
Here are the 4 historical bull market tops since 1950
This bull market ended when the real Fed Funds rate was at 1.14%. It’s currently at -1%.
This bull market ended when the real Fed Funds rate was at 2.08%. It’s currently at -1%
This bull market ended when the real Fed Funds rate was at 2.29%. It’s currently at -1%.
This bull market ended when the real Fed Funds rate was at 1.31%. It’s currently at -1%
While the Fed is tightening monetary policy, the more important point is that monetary policy is still VERY LOOSE and accomodative for the stock market. The Fed needs to hike interest rates at least a few more times before real (inflation-adjusted) interest rates are no longer negative.
Previous economic expansions and bull markets ended after the real Fed Funds rate reached at least 2.5%. Since interest rates are still so low and this economic expansion is aged, I don’t think the real Fed Funds rate will reach 2.5% before this bull market ends.
Click here for more market studies.