Market Update: Goodbye Greenspan

Yesterday the Federal Reserve raised interest rates another quarter percentage point, pushing borrowing costs to their highest point in five years. More importantly, the central bank also hinted that another rate hike was very possible when it meets again at the end of March. I always suspected that the Fed had two more rate hikes in it before yesterday, so hopefully we’ve got one down and just one to go. Stocks reacted to the Fed’s moves with a predictable selloff, but that’s not surprising after seeing the market move up solidly in the first month of the year.

Now the conventional wisdom on Wall Street, or at least the talking points given by your average stockbroker trying to get you to buy what he or she is selling, is that once the Fed puts on the brakes stocks will go through the proverbial roof. Well, if history is any indication, this is simply not true.

In fact, according to data compiled by the firm Ned Davis Research, since 1929 the S&P 500 was actually lower six months after the last rate increase in a tightening cycle 71% of the time, and down 64% of the time 12 months later! So if history is any prognosticator, there is a much better chance of a down market in 2006 even after the Fed stops raising interest rates. Don’t believe all the hype about clear sailing after the Fed is done hiking rates. History simply does not bear this thesis out.

Now don’t get me wrong, I am not predicting that we’ll have a bear market in 2006, nor am I predicting that everything will be rosy in the year ahead. Nobody out there can be sure. So why listen to me? Because no matter what happens with stocks, my Successful Investing, VIP Investor and High Monthly Income services are prepared to profit regardless of market conditions.

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Finally, we must say goodbye to a seminal figure in our industry. Yesterday was Alan Greenspan’s final day as chairman of the Federal Reserve, a position the "maestro" had occupied for nearly 19 years. Always the subject of intense scrutiny, the often praised and sometimes intensely maligned chief of the central bank presided over the greatest expansion of stock market wealth the world has ever seen. He did so with grace, class and an understated charm that made him the fascinating figure that he was. I didn’t always agree with Mr. Greenspan’s moves on monetary policy, but I always respected his decisions because I knew they were thought out from every possible angle. The only exception here is when he allowed interest rates to fall to rock bottom levels, which forced people to abandon traditional savings accounts and take more risk with their savings. This bad decision was also responsible for the mortgage refinance boom and housing bubble that could get ugly soon. Greenspan’s successor, Ben Bernanke, will almost certainly have to deal with the dubious consequences of this black mark on an otherwise solid legacy.