Economic Growth and Higher Interest Rates are Good for Stocks

I am somewhat bemused by today’s market action. Earlier today, ADP reported that U.S. companies added 215,000 jobs in November, the biggest monthly rise in over a year. This was much better than what economists had anticipated. At the same time, new home sales also posted a large percentage increase albeit from a low base. What this tells me is that our economy is continuing to grind forward, and gaining some positive momentum. In my book, this should be positive for equities.

Yet, equity investors seemed more concerned that as our economy continues to improve, the Federal Reserve will begin to reduce the amount of bonds that they are buying, resulting in an increase in interest rates. While I agree, I believe a return to a normal yield curve is a positive as well and is something that we should be looking forward to, not running away from. Nevertheless, the market has been in the red for most of the day, continuing a trend that we have been experiencing since the first of the month.

Eventually, I believe a strong economy will overpower the perceived negatives of higher interest rates. Yet, to see this type of knee-jerk reaction to what is good news, makes me wonder at times whether the market is as efficient as we are lead to believe.

All comments and suggestions are welcome.

Christopher J. Kress, CFA