U.S. equities market and stock exchange traded funds may still have legs, even if the Federal Reserve hikes interest rates.
Year-to-date, the SPDR S&P 500 ETF (NYSEArca: SPY) rose 3.0%, iShares Core S&P 500 ETF (NYSEArca: IVV) gained 3.4% and Vanguard 500 Index (NYSEArca: VOO) increased 3.4%. The equities market may maintain its momentum even if the Fed decides to slowly raise interest rates.
In a recent study on the S&P 500, Ned Davis Research found that the stock market typically continued to rise when interest rate hikes were gradual and slow, reports Evelyn Cheng for CNBC.
According to the study, the average gain for the S&P 500 over a year was 10.8% during slow rate hike cycles, but the index declined 2.7% in a fast rate hike cycle.
During a slow pace in Fed hikes, Treasury yields would also slowly rise, which would allow investors to better adjust and act accordingly. In contrast, a fast interest rate hike could cause investors to shift out of stocks for higher yielding and safer assets, like bonds. A fast cycle describes a series of hikes in back-to-back central bank meetings.
“The fact that interest rates are starting at a low level should be taken into account,” Ed Clissold, Ned Davis U.S. market strategist, said on CNBC. “Even after a few rate hikes, any relative valuation measure would still favor stocks over bonds.”
A slower rate hike schedule would also reflect the Fed’s more moderate view on the economy.
“It would stand to reason that if the Fed is going to slow, they are not anxious to slow the economy in order to fight escalating inflation, rather just tap the brakes a bit, which would still allow the economy to grow at a reasonable pace and therefore enable stocks to do relatively better than if the Fed was pushing hard on the economic brakes,” Brad Sorensen, director of market and sector research at the Schwab Center for Financial Research, said in the article.
Moreover, John Lonski, chief economist at Moody’s, argues that a gradual hike would help lessen fears that higher rates would suddenly spike and affect potential costs, like higher borrowing fees and lower consumer spending.
SPDR S&P 500 ETF
For more information on the stock market, visit our S&P 500 category.
Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own shares of IVV and SPY.