With the broader stock market gyrating based on expectations of the Federal Reserve’s possible interest rate increase, the NASDAQ Biotechnology index and Russell 2000 are still holding up near their highs. A closer look at the current market dynamics suggests rising interest rates won’t be the cause of a stock market collapse.
Stock Markets Still Positive
The Dow Jones Transportation Average is in consolidation (since December of last year), down somewhere in the mid-single-digits from its all-time record-high. It had been the leader for quite a while.
There’s still positive sentiment in the stock market, despite the attempt to try and discount the next interest rate increase.
Naturally, stocks have been due for a material correction for a number of quarters now. Over the last several years, we’ve really only seen price consolidations, not full-blown corrections, which is a reflection of the generous monetary environment.
This stock market could very well churn right into the fourth quarter this year, which is why dividend income is so important.
Top Performers Continue to Show Strength
Many of the market’s top performers are still looking relatively strong in the current environment.
Some of these companies include Celgene Corporation (CELG), Starbucks Corporation (SBUX), Costco Wholesale Corporation (COST), E. I. du Pont de Nemours and Company (DD), Apple Inc. (AAPL), Lockheed Martin Corporation (LMT), The Clorox Company (CLX), 3M Company (MMM), The Boeing Company (BA), The Walt Disney Company (DIS), and Bristol-Myers Squibb Company (BMY).
Notably, many of the stock market’s continued best performers are conservative, investment-grade stocks that aren’t fast growers. What they do offer is earnings stability and rising dividends. No doubt, this is still a market where institutional investors will pay for earnings certainty, just like they did in the breakout of January 2013. (See “Johnson & Johnson, 3M, Union Pacific: 3 Stocks to Consider Buying While the Market Is Slow.”)
I continue to like the stock market’s existing winners because of their earnings predictability, and it’s what institutional investors are still buying. However, this is a marketplace that is very deserving of a material price retrenchment.
A full-blown correction in the stock market, while painful, would go a long way in helping earnings catch up to valuations. If it’s related to rising interest rates, so be it. Rates will only be going up for a reason.
How Rising Interest Rates May Affect Stocks
I’m still seeing Wall Street sales and earnings forecasts tick higher for calendar year 2016 in a lot of brand-name companies (except energy). And this is in the face of the rising U.S. dollar, which is having a material currency translation effect on financial reporting.
In terms of stock market leadership, we still need to keep an eye on the NASDAQ Composite. Technology leadership is key if the bull market is to mature. (I don’t believe the bull market began with the March 2009 low; rather, I believe it began in January 2013, as stocks broke out of a major price consolidation following a recovery period.)
There is not a lot of new action to take in a stock market that’s churning, trying to digest a rising interest rate environment. We do know, however, that the Federal Reserve is keen to keep Wall Street happy. So, in a sense, even rising interest rates shouldn’t deter the stock market’s continuing primary trend.