ROSENBERG: Bull Markets Don't End After The First Rate Hike
The Federal Reserve is widely expected to start raising rates some time in 2015. Markets are antsy about the timing of the rate hike and what it could mean for the stock market.
David Rosenberg at Gluskin Sheff expects that the rate hike will come in the first half of the year at the earliest. But he doesn't think we should be worried about rate hikes.
Rosenberg points out that the last rate hike occurred in 2006. And that in fact now it will be nine years before a hike. He writes that a rate hike is "long overdue," and that he is worried the Fed might outstay its welcome.
"The history books show that at no time did a bull market end after the first rate hike. 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 has never been a time when the cycle was more than halfway through at that point of the first rate increase."
He points out that the stock market only begins to "peak out and roll over —in terms of magnitude, not just duration," when Fed rate hikes are already under way.
"The average increase in Fed funds rate is 350 basis points (and the media 220 basis points) from the lows before the S&P 500 finally begins to succumb to the liquidity squeeze, and since 1960 the smallest run-up that induced a bear market was 130 basis points."
Rosenberg also thinks that historic peaks in the S&P 500 occurred when the gap between the 10-year U.S. treasury note and two-year was 50 basis points or less, that curve is now +200 basis points.
"So at some point, yes, Fed rate hikes will cause a market setback, but that is usually in the mature stages of the tightening cycle as the yield curve flattens," he writes. "I see that more as a 2016 story — which means the market won't have to deal with it until it starts to price in the growth implications of that flatter curve, likely in the second half of 2015."
That being said, Rosenberg thinks sector rotation is important. But the stock market worries can wait another year.
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