NEW YORK (MainStreet) — Volatility in the stock market is expected to be part of the norm this year as the Federal Reserve weighs the economic outlook of the U.S.

As the Fed decides when it will make its first rate hike since 2006, economists are now leaning toward an increase from nearly zero to occur in September instead of earlier predictions of June. The Fed will continue to monitor the economic progress of the U.S. and progress of the labor market. Fluctuations in the dollar are also affecting the performance of the market.

Fed Vice Chair Stanley Fischer said at the Economic Club of New York on Monday an interest rate increase could occur in “June or September or some later date or some date in between.”

Increases in interest rates are “extremely difficult to forecast,” said Joe Jennings, a senior vice president with PNC Wealth Management in Baltimore. While rates will rise “at some point,” investors do not need to be alarmed even if they have a portfolio with fixed income assets such as bonds, he said.

Market Cycle Taking Its Course

Investors should view the current volatility as the market cycle taking its course, said Edison Byzyka, vice president of investments for Hefty Wealth Partners in Auburn, Ind. While the market has been volatile numerous times over the past 20 years, the previous recession has put investors on high alert. Rising interest rates are part of an economic cycle which signals “growth and optimism in economic activity, not the other way around,” he said.

The average American will be affected in different ways and consumers who are fans of savings accounts, CDs and money market funds will benefit slightly, Byzyka said. Between 2004 and 2006, the market experienced the longest prolonged period of interest rate hikes over the past 30 years, yet the markets were only mildly affected, he said.

Short-term volatility should definitely be expected, but it should not guide or change the long-term investment objective of any individual,” Byzyka said. “We have no historical basis to justify any sort of armageddon.”

Investors who are several decades shy of retiring should “not get caught up in the noise,” because you can not react to everything, said Mark Tan, a financial advisor with Thrivent Financial, a Lake Forest, Ill.-based non-profit financial services company. During periods of volatility, investors should view this as an opportunity to buy more shares of a mutual fund for their retirement portfolio or seek out high quality companies with predictable, strong balance sheets who are investing money in purchasing equipment or increasing their workforce, he said.

Interest Rate Hikes Will Be Small

“At certain times of the year there will be more volatility and the pullback in the market is an opportunity for investors to get in at a lower price,” Tan said. Interest rate hikes will likely be moderate and will increase gradually. The typical Fed rate increase in the past has been 0.25% or 0.5%, so there will not be any “dramatic” hikes, he said.

While the market will be more volatile this year compared to 2012 or 2013, there is no reason investors should make any dramatic changes to their retirement portfolio such as putting everything in cash, said CJ Brott, a portfolio manager on Covestor, the online investing marketplace and a registered investment advisor with Capital Ideas in Dallas. While the Fed could increase short-term interest rates, they can not influence long-term rates because those are affected by the economy and inflation, he said.

Since other countries are experiencing slower growth compared to the U.S., it less likely that long-term interest rates will rise due to pressure from inflation.

“An inverted yield curve is one where short rates exceed those of longer maturities,” Brott said. “It is almost always followed by a bear market in stocks. That possibility will increase volatility as investors attempt to avoid the next market meltdown.”

Stock Market Returns Will Decline

Investors should be concerned because “rising interest rates are not good news for the stock market, said Bob Johnson, CEO of The American College of Financial Services in Bryn Mawr, Pa.

During the period from 1966 through 2013, stock market returns have historically been highest in expansive Fed policy periods or when interest rates and been falling and lowest in restrictive periods when interest rates have been rising, according to research conducted by Johnson, along with Gerald Jensen of Northern Illinois University and Luis Garcia-Feeijo of Florida Atlantic University. The three published their findings in the book Invest With the Fed (McGraw-Hill, 2015).

The return differences for stocks have been dramatic. During expansive monetary conditions, the S&P 500 has averaged 15.18%, while in restrictive monetary conditions, the S&P 500 has returned 5.89%, Johnson said. During indeterminate conditions it has averaged 11.10%. The return difference for smaller stocks has been even more dramatic.

The returns for the bond market tell a different story. The research found that 10-year Treasury bonds provide similar returns during expansive and restrictive conditions – 6.44% during expansive conditions and 6.30% during restrictive conditions.

Investors should focus more on the direction of interest rates and how they influence stock and bond returns instead of the level, Johnson said.

“When rates are rising, stock and bond market returns are lower and when rates are falling stock and bond market returns are higher,” he said. “If the Fed starts to raise rates, investors should expect to earn lower returns in both the stock and bond markets.”

--Written by Ellen Chang for MainStreet