When newspaper headlines scream about a massive meltdown on the stock market, I know it’s time for me to put the drama into perspective. I do this purely for money-making reasons.

Yesterday our stock market lost $41bn in value so of course, it’s a big story for my colleague Ben Fordham on 2GB. I covered this with Ben to explain the reasons why our stock market is down 6.8% since Friday morning last week.

S&P/ASX 200

And worst still, our market is down 9.8% since the start of the year and now even my financial planning clients are getting worried enough to call and ask how worried I am. My answer to them is — I’m not!

In my Switzer Report for subscribers who are investors and who pick their own stocks, I warned that after a great stock market year, January can be disappointing.

That said, historically, January is a good month for stocks but we are living through crazy times so I have to search for sensible interpretations. I earn my money when I can be the voice of reason and keep my head “when all about you are losing theirs…” to quote Rudyard Kipling.

This is a classic case of follow-the-leader that we suffer from because of our links to Wall Street. And as the old saying goes, “when Wall Street sneezes, the world catches a cold!”

Given our last two years of fighting Covid, we should be more resilient to the threat of viruses, but this one comes from the most important economy in the world and it comes in the shape of rising interest rates.

Our market lost $41bn yesterday as stock prices fell because the boss of the Federal Reserve, Jerome Powell, basically said his central bank will fight inflation with as many interest rate rises as necessary. This summary from CNBC says it in a nutshell:

“Fed Chairman Jerome Powell rattled markets Wednesday saying the central bank has 'quite a bit of room' to raise rates before negatively impacting employment. Yesterday’s FOMC decision and Powell’s presser was both positive and negative for markets, but in the end, it mostly reinforced what we know: The Fed is serious about raising rates, that’s going to continue to ... keep markets volatile,” Tom Essaye, founder of Sevens Report, said in a note.

When interest rates start to rise, the initial reaction is “oh no”! Like tech stocks, growth stocks will see their prices fall because they don’t make profits, they borrow money and higher interest rates threaten them.

It’s kind of true, but, over time, after they’re sold off and are at lower prices, the same fund managers who sold them buy them again! The stock market plays games and part-timers often don’t know the rules.

In fact, the history of interest rates going up is actually good for stock markets more times than not. The table below shows that the average rise of stocks during a rising interest rate cycle is 23% for the Dow and 32% for the Nasdaq.

How stocks rise with higher interest rates

Eventually, if the central banks of the world raise interest rates too many times, they could choke off the economic recovery/boom, which I think looms ahead for 2022 and 2023. But I don’t think the Fed is that dumb and I know our Dr Phil Lowe of the RBA is not mad keen to raise interest rates until it’s prudent to do so.

Strongly performing economies and, ironically, the US receiving a better-than-expected economic growth reading overnight will help hose down these ‘too hot’ concerns about rising rates.

The annualized December quarter number for economic growth was 6.9% compared to economists’ forecast of 5.5%. This is good news for anyone wanting stocks to go higher.

This year, there will be worries about how many interest rate rises the Fed introduces, but if they’re less than what some smarties are concerned about now, then the market will rebound and we’ll be up for the year.

I’m still expecting our stock market will be up 10% this year as a minimum, despite plenty of ups and downs. And my confidence was buoyed when I saw one of the world’s best investors, Pershing’s Bill Ackman, buy 3.1 million Netflix shares this week. This gutsy play helped its share price jump 10% after slumping last week. That’s a $1.1bn bet on a tech stock that was dumped only a week before and had lost 30% since January 20!

One day we will see a real stock market crash but this is a correction, as the world adjusts to rising interest rates. We have to hope central banks manage this process well and that’s what I’m gambling on.

If we see the end of the Covid threat in its many forms, economic growth remains strong and interest rates are raised wisely, there will be a boom as supply chain problems decrease as the world gets back to something like normal over the year and into 2023.

This is the best-case scenario that will help stock markets get over this current correction anxiety. I think there’s a good chance that will happen. I bet Bill Ackman does too.