Investors Face Quagmire of Falling Earnings, Higher Rates

“Investors may wade into unknown territory next month as the Federal Reserve readies the first rate hike in nearly a decade amid a corporate earnings recession.”

In this Reuters article, Rodrigo Campos explores the following factors that can be used to predict what could happen in the financial markets in the near future.  Consider the following

1. The Federal Reserve may raise interest rates in December–the first increase in nearly a decade.
2. Earnings for the third quarter of 2015 for 90 percent of the corporations listed in the Standard & Poor 500 are lower than expected.
3. The decline in corporate revenues has been steeper than the drop in earnings.

As pointed out in this article, rising interest rates are always a negative factor for stocks.  Since 2013, every time the Fed has indicated a rate hike is on the horizon, the stock market throws a tantrum, and the Fed decides not to raise rates.  At the time of this blog, it is impossible to know if the Fed will raise interest rates in December–especially with corporate earnings on the decline.  Even the experts are not sure what will happen between now and the end of the year.

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Teaching Suggestions

You may want to use the information in this blog post and the original article to

• Discuss the relationship between corporate revenues, earnings, and stock prices.
• Explain the affect an increase in interest rates could have on the financial markets and consumers.
• Explore possible investments for a down market and a market on the upswing.

Discussion Questions

1. What is the relationship between corporate revenues, corporate earnings, and stock prices?
2. What affect would a Fed decision to raise or lower interest rates have on the financial markets? On consumers?
3. Assume you have $375,000 invested in a diversified retirement portfolio. Corporate stocks in your portfolio include utilities, technology, energy, and consumer stables–some of which have reported lower earnings for the last two quarters.  You also assume the Fed will raise interest rates in December.  Would you sell some or all of your holdings?  If you decide to sell, how would you determine which securities to sell?  Explain your answer.