NEW YORK ( TheStreet) -- Sometime next year, the Federal Reserve will begin raising interest rates. The central bank may even signal that move next week when its policymaking committee meets for the final time this year.
Investors are already bracing for the announcement. But history suggests that markets shouldn't be afraid of higher interest rates--and should even embrace them.
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"I don't think the market should freak," S&P Capital IQ strategist Sam Stovall says. "We've had these kinds of [small, short-term] losses 60 times since World War II. It takes us two months to recover."
Take a look at three examples from the past two decades. They all teach the same lesson.
The most recent case happened in May 2013, when then-Fed Chairman Ben Bernanke offhandedly told a congressional committee the central bank might begin winding down its stimulative bond purchases within "the next few meetings." Markets quickly sold off, and stocks lost some $3 trillion in value, Merrill Lynch strategist Savita Subramanian estimated at the time.
But by the end of the year, the S&P 500 (SPY) was up 11% from the day before Bernanke spoke. Treasury bonds took longer to recover, but eventually did get all the way back to their old yields by this fall. And even when the Fed actually did stop new purchases of bonds this past October, the market briefly swooned and then came back.
Much the same thing happened in 2004 and in 1994.
In January 2004, the Fed signaled its intent to start raising rates by removing its pledge to keep rates low for a "considerable time." That's exactly what policymakers are expected to do next week.
After the Fed move in 2004, the S&P fell to about 1,060 from about 1,150, but then closed the year at 1,212 even though rates had begun rising. The economy grew 3.8% that year.