With recent economic data indicating that the U.S. is nearing full employment, wages have increased by 2.8% on an annualized basis and everything looks great, we get the news that interest rates will likely be increasing. What does it mean? It could mean that our robust stock market is due for a correction. When interest rates go up, businesses begin to pull back on using debt to expand and increase employment. The main issue to think about is, if interest rates increase, will the stock market collapse. We have heard claims by the Federal Reserve that in September there will be an increase in short term interest rates. Will a ¼ percent increase cause a major reaction? Only time will tell.
Corporations are reporting good earnings, for the most part, so even with a small uptick in rates; the market could continue to climb beyond current levels. Many stock analysts are afraid to say that the market could go higher though, for fear of looking bad. Janet Yellen, the Fed Chairperson, recently mentioned that the market was high. Typically, when there is fear and concern about a major market decline, it does not happen. We may experience a correction of the market at any point. However, major declines seem to happen when most investors cannot imagine being in anything other than stocks.
Diversification is important for anyone in the stock market. This means investing in a variety of different industries and investing in quality companies within those industries. Purchasing some stocks in companies that pay dividends is a good strategy as well. This helps increase the overall return of an investment portfolio. There will be swings in the market, no doubt. However, not always, but usually the danger occurs when investors have no fear.