Federal Reserve Bank Chairman, Janet Yellen has been hinting that the Fed FOMC is on the cusp of increasing interest rates once again. This will be the second time in 8 years (the first being in December 2016), that the Fed has raised rates. Among the reasons cited for the increasing likelihood of a rate hike is the desire not to see the US economy overheating. An economy ‘overheats’ when there is too much money chasing goods and services and aggregate supply cannot keep up. When growth occurs at an unsustainable rate, this boom can cause the economy to overheat. One way to taper an overheating economy is monetary tightening in the form of rate hikes.

Why are Stock Markets Improving if Rates are Rising?

Typically, stock markets react negatively to rate hikes. The reason being, interest rate increases make it more expensive to borrow money. This eats into a company’s profitability and costs get passed on to consumers in the form of higher prices. But in the case of gradual interest rate hikes, there is an entirely different dynamic taking place. Given that the US economy is robust and flourishing, interest rate hikes are perceived as a bullish sign for investors. An increase in the FFR is necessary for demand and supply to balance out. Investors take kindly to this by flooding Wall Street equities markets with fresh injections of capital. Additionally, the actual rate hike number (25-basis points) is minimal, given the historical lows of US interest rates. This does not adversely affect Wall Street bourses. In short, analysts, traders, investors, and policymakers believe that economic growth in the US has long-term viability.

Trading Opportunity #1 – S&P 500 Index Roaring and a Definite Bullish Option

The S&P 500 index officially celebrated its 60th birthday on Saturday, 4 March 2017. Despite recording negative movements last week, the index also reported its sixth successive week of gains. On Wednesday, 1 March 2017, the S&P 500 index, the Nasdaq composite index, and the Dow Jones all reached record highs, and the trend is set to continue. The S&P 500 index is one of the most highly capitalized indices in the world with an estimated $2.4 trillion indexed to it. This premier index is weighted according to market cap.