IF THE Federal Reserve does increase interest rates on December 16th, very few investors will be taken by surprise. It will be the most discussed, most anticipated rate rise in history.
Typically, markets buy on the rumour and sell on the news. So although higher interest rates might be expected to boost the dollar, and be bad for both equities and Treasury bonds, the market may have fully anticipated the impact. The dollar has already risen by 10% against the euro this year.
History suggests that the first rate increase is not a huge market-mover. BCA Research has looked at 17 rate-tightening cycles since 1971. In the three months after the Fed raised rates for the first time, the stockmarket fell on ten occasions, rose on six and was flat in the other instance. Thanks to a couple of very strong rallies during the mid-1980s and mid-1990s, the average movement was a 1.1% gain. On average, the Treasury-bond market marginally underperformed equities in the three months after a first rate hike.
But as Citigroup points out, the Fed is starting to tighten at an unusual time. Normally, the move is made to head off...Continue reading
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