Barometer for Long-Term Stock Futures Points Upward, Even With a Fed Rate Hike

With the U.S. presidential election in the rear-view mirror, Wall Street analysts are increasingly positive on U.S. stock futures, as the Federal Reserve mulls an interest rate hike in December.

Stock futures have been on an upswing of late. The benchmark S&P 500 E-Mini December 2016 contract, while down in Monday trading this week, is up 3.85% in the past 30 days, and is up 6.86% over the past year.

That's the scenario as economic indicators are strong in late 2016, with oil and metals markets gaining strength and corporate earnings rising.

"Futures are higher following stronger crude oil and metals markets," states Alan Bush, a commodity analyst with ADM Investor Services, in a November 21 research note. "Crude gains are linked to optimism that the Organization of Petroleum Exporting Countries will agree to reduce production at its meeting on November 30."

Bush adds that analysts are predicting third-quarter corporate earnings growth will be 2.6%, much higher than previous economists' expectations of a 1.6% decline.

"Thus, the long-term trend is higher for stock index futures," Bush notes.

Others agree, but note there are counter-balancing economic factors, as well. "Economic growth is accelerating again amidst a long, slow economic expansion," says Jason Pride. Glenmede's director of investment strategy. "But rising inflation, interest rates, and the dollar will be headwinds to the ongoing expansion."

But would stocks continue to rise if the Fed does hike rates?

Maybe not, at least in the short-term, says Larry Elkin, president of Palisades Hudson Financial Group in Scarsdale, N.Y. "Don't be surprised if financial markets, including stocks, bonds and currencies, react sharply and negatively to the Fed's decision," Elkin says.

While that scenario may seem counterintuitive if the economy is strong and the Fed is only going to raise rates incrementally, Elkin says the explanation is simple enough.

"Despite years of near-zero interest rates, the United States is still far out in front of the rest of the world in trying to normalize financial conditions," he explains. "European pessimism seems unlikely to abate any time soon, especially with the United Kingdom poised to leave the European Union in the next few years. Japan continues to try to kick-start its sluggish economy, and opacity in China means conditions there are hard to evaluate from the outside. The Fed is left more or less alone in the vanguard as the U.S. inches back toward normalcy."

"Any soldier can tell you that the person who is 'on point,' leading his platoon into the battlefield, is the one most likely to encounter land mines or sniper fire," he adds. "Being out in front is liable to make anyone a little jumpy."

Even so, a December rate hike will be modestly good news for savers and significantly better news for banks, Elkin states. "On paper, the U.S. economy seems well-positioned to withstand a small hike, and an increase has to come sometime - gradually now or, potentially, sharply later," he says.

That should also be the case with stocks, other investment professionals say.

"I believe the stock market can continue to grow with a Federal Reserve rate hike," says John Daly, founder of Daly Investment Management. "Rising interest rates are usually a signal of a healthy, growing economy."

Daly says the Fed usually increases interest rates to either cool off economic growth so it doesn't overheat, while also combating inflation. "The Fed has been hesitant of raising interest rates because they were concerned that the economy was not strong enough to encounter a rate hike and it would have been a negatively impacted," he adds.

While strong stock market performance should continue, investment experts add that investors should brace for strong volatility, too.

"Short-term volatility is a fact of life in the stock market," says David Royal, president of Thrivent Mutual Funds. "To invest successfully for the long term, you need to become comfortable with some level of volatility." Royal advises most investors to invest in accordance with an appropriate plan and focusing on the long-term - 10, 20 or even 30 years out - rather than making any short-term, market-timing moves.

"However, for those who may want to lighten their stake in the stock market, aggressive and moderately aggressive asset allocation funds allow you to continue to invest the majority of your assets in the stock market while diversifying with fixed income securities and other types of investments," he says. "While diversification can't eliminate market volatility, it can dampen its effects and allow investors to stick to their long-term asset allocation strategy - while still allowing them to sleep at night."

By and large, Wall Street-watchers, with some exceptions, see a strong stock market that should continue to flex its muscles in 2017, even with the Federal Reserve hiking rates. Stock market futures performance seem to back up that outlook - for now, anyway.

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