Fears that the Fed will begin cutting back on easy money later this year has unnerved investors. We looked to the past for guidance, and what we found defies conventional wisdom.
We -- interest rates would stay this low for ever. And now pitcher Ben Bernanke has set to happen how will get back to higher rates does that mean -- the bull market for stocks. Maybe not we will -- two renowned experts Carnegie Mellon political economist Allan Meltzer who wrote these history on the Federal Reserve. And NYU financial historian Richard seller author of a history of interest rates. Professor Meltzer says investors turned bullish once again convince the Fed will stick to its guns. As chairman Paul Volcker did and stubbornly hiking rates in 1981. Interest rates go up to -- fed tightening. So that's bad for the -- marker but the longer term thing is you know we're going to get rid of the inflation. So that's good for start once they're convinced as the example I gave you -- walker and 81 once they're convinced that he's going into. It's gonna work. They'll be enthusiastic about. Popular wisdom has it that rising interest rates hurt stock prices because fixed income investments look like a more attractive alternative. But bringing associates founded in eleventh cycle since 1963. In which the Fed tighten monetary policy. The S&P 500 gained half -- percent in the first month even though it fell more than half the time. After three months the S&P 500 gained a little more than half a percent over twelve months more than 3%. During that tightening cycle itself stocks rose on average nearly 9%. Stocks fell and only one of those cycles dropping more than 24% between January 1973. And April 1974. What's different this time though is that rates have never been this low professor Seles says the closest parallel is in 1950. You should look at that bit of history because that's superiors wouldn't you know not quickly but just gradually long term government bond interest rates trended up. From two and a half percent where they were at the beginning of the period. Today between four and a quarter and 5% toward the end of the period and while that was happening the stock market had a great -- You know if you bought stocks in 1949 and held them to 1958 you have got something like in real terms something like. 1516%. Annual average return and realtors. Something like the 1980s and nineties given how -- the fifties worked for stocks he says. The worry of jumping into bonds until long term rates get closer to fortify percent.