Four Fed rate hikes in 2018 but no immediate threat to equities

NN Investment Partners has revised its forecast from three to four Fed rate hikes this year, followed by three next year.

Although the rises, together with a soft ECB taper after September, will spur bond yield rises, NN Investment Partners’ analysis of historical rate rises from 1994 to 2015 shows that this points to little immediate threat to equity markets. The analysis (see below) shows that despite causing intermediate corrections, equities typically ended these years in positive territory, except for 1994.

Patrick Moonen, Principal Strategist Multi Asset, NN IP, commented: “Our findings are not straightforward and other factors were at play. But the current rise in bond yields does not pose an immediate threat for equity markets. Strong market fundamentals and the high equity risk premium provide a decent buffer against higher bond yields.  Only a big inflation scare or a policy overshoot would spell trouble, and neither is likely in 2018.

“Where rising bond yields do make a difference is on a sector level, supporting cyclical over defensive sectors.”