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Wells Fargo Strategists: Stocks Rose the Last 2 Times the Fed Began Raising Rates

By Dan Weil   |   Wednesday, 27 Aug 2014 12:54 PM

Any time speculation has intensified recently that the Federal Reserve will raise interest rates sooner than expected, stocks have almost always fallen.

And many experts predict the market will do exactly that once the Fed finally does increase rates. But history indicates that might not be the outcome.

Wells Fargo Strategists Stuart Freeman and Scott Wren looked at the forward 12-month change in the S&P 500 for the 36 months that followed the start of Fed rate hikes in February 1994 and June 2004.

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They found that the S&P 500's moves during both periods were "persistently positive," Freeman and Wren wrote in a report.

"In other words, although volatility can rise early in the tightening phase, positive fundamentals continued to support the stock market in the last portions of these two cycles," they said.

"While there is significant angst surrounding the beginning of Fed tightening today, investors should keep in mind that tightening is the Fed's way of saying that it thinks the economy is on better footing," the pair explained.

"Ideally, increases take place only as the Fed believes the economy is capable of moving ahead under its own momentum at the higher interest rate levels."

Federated Chief Equity Strategist Phil Orlando agrees. "When the Fed eventually begins to raise the [federal] funds rate next year, that in our view is not the death knell of this rally," he told CNBC.

"The market is going to appreciate the fact that [this] . . . must mean the economy is starting to normalize for the first time in seven or eight years."

The Fed has kept its federal funds rate target at a record low of zero to 0.25 percent since December 2008.

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