By Oliver Pursche
With a week to go before the Presidential Elections investors are fretting over the outcome and what it might mean for markets. Putting aside the possibility that the results might be contested and therefore unknown for several weeks (think back to Bush/Gore in 2000), the real focus for investors should be on economic data, the Fed and the congressional races that might impact fiscal policy over the next two years.
As far as rising interest rates go, while conventional wisdom states that rising interest rates have a drag-down effect on the economy and is generally viewed as a poor environment for stocks and bonds, evidence suggests the opposite holds true. Central banks raise interest rates in response to an “overheating” of the economy or concerns of rapidly rising inflation.
While many would argue that this environment does not exist today, there is a solid case to be made for raising rates at this juncture. The impact of declining energy prices is likely behind us, meaning that this will no longer put downward pressure on inflation, while continued employment growth should translate into higher wages — early signs of which can already be seen in the monthly JOLTS (Job Openings and Labor Turnover Statistics) report. From a historical perspective, the U.S. economy, corporate earnings and stock market returns have all fared well in the early stages of a rising rate environment.
For those worried about a deep or prolonged correction, keep in mind that since 1980, the market — as measured by the S&P 500 /zigman2/quotes/210599714/realtime SPX +0.08% — has been in negative territory at some point in each year, with an average intra-year drop of just over 14%, all the while ending in positive territory for the year 75% of the time.
This week's market-moving events
Monday: Personal income and spending, Chicago PMI, Dallas Fed manufacturing survey, Japanese and Chinese economic data (after the close).
Tuesday: Motor-vehicle sales, Redbook report, PMI and ISM manufacturing, construction spending.
Wednesday: FOMC statement
Thursday: Chain-store sales, jobless claims, PMI services, factory orders, ISM non-manufacturing data.
Friday: October employment report, international trade.