Fed raises interest rates but despite the Dow falling, nothing suggests a stock market crash is anywhere near on the horizon


What’s the big deal?

Overnight the US Federal Reserve lifted interest rates by 0.25 of a percentage point to a range of 2 per cent to 2.25 per cent.

Another interest rate hike is flagged for December, with three more in 2019, followed by one more in 2020, suggesting the benchmark lending rate would increase to around 3.4 per cent.

The stock market hates the prospect of higher interest rates, with the Dow shedding more than 200 points from its intra-day peak.

In the absence of any local data, the Australian share market is taking things in its stride, the ASX 200 index falling just 2 points at the open to 6,190.

What does this mean?

Cheap money — in the form of low interest rates — has fuelled the global economic expansion since the GFC, and the roaring stock market, particularly in the US.

Investors fret about anything that has the potential to derail the great rally in global asset prices.

US Fed chairman Jerome Powell is treading a fine line between keeping the US economic expansion on track and an economy that overheats.

With US unemployment low, and the US economy expected to grow at a faster-than-expected 3.1 per cent this year, the fear is inflation will rear its ugly head, something that would see interest rates being hiked higher than is currently anticipated.

As of now, there are no signs of inflationary pressures. The Fed sees the US economy continuing to expand moderately for at least three more years.

Despite the mini temper-tantrum from the Dow, the reality is the US economy is in a classic Goldilocks phase, not too hot, not too cold, but just right.

What should you do?

From a stock market perspective, as ever, regularly add to your portfolio. That might come from dividend reinvestments, savings or superannuation contributions.

An investor’s greatest fear is a full blown stock market crash. Nothing about the Fed’s increased interest rate suggests that was any more likely today than it was yesterday.

On the contrary, at least three more years of US economic growth, coupled with low inflation, suggests shares have got further to run.

Australia is in a different phase to the US.

Steady unemployment, falling house prices, the RBA’s interest rate stuck at just 1.5 per cent and ASX blue chip stocks that have run out of domestic growth opportunities suggest the ASX 200 hasn’t got a lot of upside potential.

This has already been borne out in the meagre 2.2 per cent gain for the benchmark S&P/ASX 200 index so far in 2018.

Of the large caps, year to date gains in the BHP Billiton (ASX:BHP) share price and the CSL Limited (ASX:CSL) share price have been offset by double-digit falls in the Commonwealth Bank of Australia (ASX:CBA) share price, the Westpac (ASX:WBC) share price and the Telstra (ASX:TLS) share price.

Look to small cap funds for local growth, and global orientated funds for overseas growth.

As ever, run a healthy cash balance. Although a stock market crash doesn’t look likely, cash in the bank helps you sleep better, and gives you the firepower to buy stocks if they become cheap.

Contributors to this article may own shares in some of the companies mentioned in this article. The Capital Club has a thorough disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
Bruce Jackson has 30 years of hands on investing experience. He is passionate about stock market investing, running his own portfolio and SMSF. His focus is on small cap growth stocks. You can contact Bruce at brucej@thecapitalclub.com.au