Fed Liftoff and 2016

Fed Liftoff and 2016

After 9.5 years the Federal Reserve raised interest rates by 0.25%.  Despite the media’s coverage, this one interest rate hike alone won’t have any significant impact on individuals.  However, the more that the rates go up over time, the more expensive it becomes to borrow money thereby “tightening” the supply of money.  I don’t believe that the Fed is on pace to rapidly increase rates but would like to build itself a buffer off of zero.

Equity markets have had a fairly muted reaction, but the sentiment is extremely negative.  A recent junk bond fund called Third Avenue ran into significant trouble and the energy and commodities markets continue to struggle.  People are repeatedly saying that after 5 years of very good returns from the S&P 500, the markets are due for weak performance in the years ahead.

I don’t know what 2016 will bring, but making the argument that it will be a bad year because the market was up 200% in the last 5 years is called Gambler’s Fallacy.  This is a mistaken belief, similar to saying that because a flipped coin landed on “heads” 5 times in a row that the odds increase that the next flip will be tails.

If you widen the 5 year look at the S&P 500 to 15 years and focus on rolling returns you see that these returns have been underwhelming compared to relative historic periods.  (Hat Tip Ritholtz Wealth Management)

Image from Ritholtz Wealth Management