NEW YORK (TheStreet) -- The chatter over the Federal Reserve's upcoming interest rate decision seems to be everywhere. And what's to follow the Fed's first rate hike? Of course, the talk is that there will be a correction in stocks, and some say the correction will be the "Big One." After all, you've been told all along that rate hikes are negative for equities. That naturally means a higher rate would push the Dow Jones Industrial Average lower, right? Wrong!
Historical data show that it's only toward the end of a tightening cycle that stocks start to become really bearish. That's only after several rate hikes, which could perhaps take many years. And what happens in between? The rally continues, of course. As seen below, during the 1990s when Fed tightening began, the Dow headed higher.
When the Fed began tightening again in 2004, guess what happened? The Dow gained. And if you think this time it might be different because the rally is already underway, you'd be wrong again. That's clear from the chart if you look at 2004 when the Fed began its rate liftoff.
What About China?
Of course, one of the biggest arguments against an equities rally is the trouble in China. Surely, the turmoil in the world's second largest economy would be unnerving for any investor. But if we examine the situation closely we realize that China's troubles are really good for U.S. stocks in the long run. That's because of the way China's government is tackling the crisis.
And how is Beijing doing it? The Chinese central bank is injecting massive liquidity into the market, and this means more hot money for the global economy. But where will this extra liquidity go? Just like in 2007-2008, when the Fed injected money into the U.S. economy, it will go into the stock market. And because emerging markets are so valuable, most of this hot money could eventually translate into higher stock markets. In fact, this is important, because until just recently, China had allowed the yuan to strengthen, which had burdened the global economy. Now that China has reversed this process and devalued the yuan, the pain is expected to be reversed, as well.
China Only Adds to the Rest
This latest reversal from China comes at a time when the European Central Bank is fully immersed in its own massive liquidity scheme, injecting roughly 60 billion euros monthly into the eurozone economy. And, of course, across the Pacific, Japan, the globe's third largest economy and Asia's second largest, is engaged in massive stimulus of its own.
What All of This Means for the Dow
So, how does all this boil down into the outlook for the Dow? On the one hand, we've got most of the world's largest central banks still engaged in massive stimulus. Together they've injected billions into the global economy, which supports growth. On the other hand, we have the Federal Reserve which may tighten soon. We also have evidence that the Dow keeps rising and keeps its bullish trajectory, even after a rate hike. Thus, there is only one conclusion: the Dow is heading higher and higher into a new all-time record.
- Why it's so hard for the Fed to raise interest rates.
- The good, bad and uglyoutcomes on higher interest rates.
- Everything you wanted to know about the coming Fed rate increase.
- Three things the Fed may do at its meeting this month.
- What the Fed is watching in the economy before it makes a decision.
- Why the Fed should be raising rates now.
- What happens when the Fed raises interest rates.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.