The Fed may have even done too good a job in fighting deflation worries, which are difficult to fend off once entrenched in investors' minds. Now we have a whiff of inflation, which may be at a level just in perfect balance with steady economic growth and low unemployment, the 2 percent mandate of the Fed, or it may be running a little too high to keep to the mandate. Because once the inflation genie is out of the bottle, it is hard to put it back in. That's when the Fed typically gets aggressive and raises short-term rates more frequently than expected. It normally takes a recession to bring wages back down, also called a "hard landing."
The Fed has a long track record of both inducing recessions and inflating asset bubbles. If history is any guide, market pundits have a way of underestimating the lengths that the Fed will go to in order to follow its mandate and the Fed has a way of overestimating investors' ability to act rationally.
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Not only are stock market investors unprepared for the prospect of higher interest rates, they haven't even been able to conceptualize it. I think that is a classic mistake. If you have a long time horizon, you should be all right. It's just that going from such a low interest-rate base, the time horizon needs to be thought of as longer than what a lot of safety-seekers would be prepared to accept.
One of the main objectives that go hand -in-hand with yield investing is preservation of capital — the expectation that you should get back your principal. That's what bonds are for, not stocks.
— By Mitch Goldberg, president of ClientFirst Strategy
Follow him on Twitter @Mitch_Goldberg