What stocks really like is a stable interest rate environment. In years when the federal funds rate has changed by less than 0.5 percent up or down, stocks have gained an average of 17.67 percent. So, the key to the stock market's fate next year may not depend on whether the Fed raises rates, but on how sharply it raises them.
Interest rates and retirement income
Though stocks may struggle in a rising-rate environment, the retirement saving implications will be offset to some degree by the greater income production that comes with higher savings account rates, bond yields and CD rates. If you can get more income from your savings, you may be able to get by with less growth on your investments.
To a large extent, lowering interest rates to stimulate the economy is based on encouraging borrowing. Unfortunately, it may be that the Fed has also borrowed against the stock market's future returns in order to inflate its recent performance. Investors should take note: What they've earned during this period of very low interest rates may have to sustain them through some lean times as interest rates rise.