On December 17th, I appeared on air with Stuart Varney to discuss a potential year-end rally in the stock market after the Fed’s rate hike came in around what was expected. I think a year-end rally is unlikely, and expect to see weakness in the stock markets as we move into 2016. We’ve already had three quarters in which revenues for the S&P 500 have declined and two quarters in which earnings have declined. We are seeing signs of weakness in the economy and the Fed’s rate hike impacts interest rates going forward.
One of the biggest factor pushing stock prices higher has been corporate buy backs, in which companies buy back their own shares, often issuing debt to do so. Think of just how destructive it is for a company to borrow money to buy back shares that then fall BELOW the price at which the company bought them! We are also seeing companies buy back shares while executives are selling their personal holdings – always something to look at if you are considering buying shares in a company. Higher interest rates make it more difficult for companies to issue debt in order to buy back shares and without corporate buy backs, we would have seen a net outflow from the equity markets. Tough to have prices go up when more people are leaving the stock market than buying into it!