Wall Street is notorious for creating simple rules of thumb. While some of these heuristics are based on past experience, these truisms are frequently exaggerated to the point where they lose whatever kernel of usefulness they may have once contained. All too often we see simple observations from very specific and limited sets of circumstances take on a life of their own.
This leads to a set of beliefs we often describe as “Conventional Wisdom” – nuggets of knowledge assumed to be true, but often unsupported by actual data.
I was reminded of this problem with rules of thumb recently when responding to the single most common question we hear today from clients: “What do rising rates mean for the stock market?”
Indeed, this has been a question on the tip of nearly everyone’s tongue ever since the Federal Reserve began curtailing stimulus this past December. The implied concern is that the end of the Fed’s programs of Quantitative Easing (QE) and Zero Interest Rate Policy (ZIRP) will have a negative effect on the equity portion of your investment portfolios.
This concern is understandable. The Fed’s support for stocks now and during recoveries past has been among the most frequently discussed topics amongst investors for years.