* When do rate rises really matter? We think the purpose of the Fed rate hike
this time is more benign than usual: it is to insure against financial asset
bubbles and to create room for easing into the next recession, not to control
inflation by slowing down growth. Thus the likely Fed rate rise doesn’t, in our
view, signal an equity bear market until: i) the yield curve inverts; or ii) the US
reaches full employment (which we think is when unemployment is at c.4% vs
5% currently).
* What’s different this time around? We have never seen such a desynchronised
monetary cycle globally; the first Fed hike has never happened so
late into the US economic/profit cycle; and the Fed historically has started
tightening when ISM new orders was closer to 60, compared to 48.9 currently.
* A signal for tactical caution on equities: The first Fed rate hike has
historically caused a correction of c7% in equities (and there are plenty of other
warning signals on US equities currently), though it has never marked the end
of a bull market (6 months later equities are, on average, up 2.2% from pre-Fed
tightening levels).
*