Andrew Garthwaite has a message for stock investors unnerved by the prospect of the first Federal Reserve interest-rate increase since 2006: Don’t panic.
As they bet Janet Yellen’s Fed will raise rates around mid-2015, Garthwaite, London-based global equity strategist at Credit Suisse Group AG, and his team reviewed the fallout from Fed tightening cycles as far back as 1977.
They found that equities have tended to hold gains until almost the eve of the initial increase and then extend their advance through much of the cycle after a brief dip.
The Standard & Poor’s 500 Index peaked no earlier than four months prior to the first move up in rates; by the time policy makers acted, stocks had only fallen an average 3 percent from their peak.
What’s more — markets tended to recover, gaining about 4 percent in the six months following the first increase. Exclude the rate hikes that began in 1977 and the S&P 500 Index rose at least 10 percent within 18 months of the first shift.
“While rate rises have historically led to greater volatility in equity markets, they have not marked the end of equity bull markets,” the strategists said in an Aug. 13 report.
Can history repeat this time? Garthwaite says if the Fed boosts its benchmark around the middle of next year, then the market should keep climbing through 2015.
It won’t be straight up. Garthwaite’s central case is a 5 percent drop in markets around the end of this year after the central bank ends its quantitative-easing program and a 5 percent to 10 percent decline after the Fed raises rates.
He predicts the S&P 500 will end the year at 2,020 — suggesting a 9 percent gain for 2014, making him more bullish than the majority of analysts surveyed by Bloomberg News.
“We think equities will be meaningfully higher from current levels before the correction starts and that any lost ground will be recovered thereafter,” the Credit Suisse analysts said.
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