Worried about the interest rate hikes that may be coming sooner than many had expected? Top economist David Rosenberg says to relax.
“A dive into the history books shows that at no time did a bull market end after the first rate hike,” Rosenberg writes in a Financial Post column. “Typically, in terms of trough-to-peak moves in the S&P 500, we are only one-third of the way into the bull run on the eve of the first Fed tightening in rates. That is an average, but the median is almost identical and there was never a time when the cycle was more than halfway through at that point of the first rate increase.”
Rosenberg says things could be different “given the magnitude and duration of this cyclical surge”, as The Fed usually waits only one to three years before tightening. “Even so,” he says, “the peak in the market is usually a good three years after that initial Fed volley, with the shortest lag being a year-and-a-half in the late 1960s.”
Rosenberg says the Fed funds rate usually has to rise significantly before markets turn. “The smallest run-up that induced a bear market since 1960 was 130 basis points,” he says. “I always say that we should let the yield curve do the talking and at the historic peaks in the S&P 500, both on a median and average basis, the gap between 10-year U.S. Treasury note yields and two-year comparables is inside of 50 basis points. That curve today is 230 basis points. Wake us up when the war begins.”
Rosenberg thinks the impact of rising rates on the market will come into play in the second half of 2015, at which time sector choices will be key for investors. For now, he thinks a diversified portfolio that “focuses on what works in a rising bond yield, steep yield curve, reflation-to-inflation environment, is the prudent way to go,” he says.
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