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Our warning in last month’s issue that volatility was likely to increase proved to be very timely. There were five days in September on which the S&P 500 moved by more than one percent (including one day when it dropped by nearly 2 ½%), after there was just one one-percent day in July and August combined.
Part of this volatility appears to have been caused by changing views on when the Fed will raise interest rates. As we’ve said before, trying to bet on the Fed’s action is a loser’s game. Your chances of getting it right are slim, and even if you guess right about when the Fed will raise rates, the market may react differently than you expect. While everyone expects the stock market to drop in response to a rate hike, in the past the opposite has often happened. Interest rate rises are usually in response to strength in the economy, which is generally good for stocks.
The effect on bonds is much more clear-cut: when rates go up bond prices go down. And the longer the term of a bond, the further it will fall. Therefore our advice right now is to sit tight with your stocks and be very wary of bonds.