Fed tightening doesn’t necessarily mean a bear market. The Fed is likely to begin raising rates this fall, but this doesn’t mean markets are in for a major correction. Looking at history, U.S. stocks tend to initially react negatively to the start of a tightening cycle and then rebound 6 to 12 months later, producing positive, albeit subpar, returns over the longer term. Of course, the fact that U.S. equity multiples have been consistently rising since 2011 means that markets are at greater risk for at least a modest correction, say, 5% to 10%, following Fed liftoff. That said, an initial tightening of U.S. monetary policy is unlikely to end today’s bull market.
While we may be quite happy to learn that the market is moving higher, a new high is neither something to be celebrated nor feared. New records are fairly routine and don’t necessarily contain a lot of information. History suggests that, absent an exogenous shock, neither valuations nor rates represent an imminent threat to the bull market.
Still, U.S. stocks are no longer cheap. While investors shouldn’t abandon the United States, we believe they should be raising their allocation to international equity markets, such as the Eurozone, Japan and select emerging markets. These overseas markets are also posting new highs, but at much more reasonable valuations.
Sources: Bloomberg, BlackRock
Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock. He is a regular contributor to The Blog and you can find more of his posts here.
Kurt Reiman, a Global Investment Strategist at BlackRock working with Chief Investment Strategist Russ Koesterich, contributed to this post.