With the Federal Reserve expected, by many economists, to hike the interest rate at its September meeting, there are some very good reasons why an increase should not herald the end of the current bull market which has now been running for over six years.
There are several reasons for expectations that the bull run will continue for at least two years, according to Julian Emanuel, strategist at UBS. He cites the fact that the average bull market has tended to run for about two years going back to 1977, while the average gain over that period has been 33%.
Emanuel said in a note to clients, “Given the ‘slower-for-longer’ nature of the post financial crisis U.S. equity market rally, we believe the duration of this bull market once the Fed hikes [rates] will be consistent with prior norms.”
He also noted that the start of previous rate hike cycles have been seen by equity investors as a signal of the confidence the Fed has in the sustainability of the economy.
He added that given the current environment, health care may well be at the forefront of the markets next advance.
Drew Matus, another UBS analyst, predicted that the Fed would hike the interest rate at its meeting ending on 17 September. He also added a note of caution of a possible return to market volatility as the Fed moves to normalize the monetary policy as many newer traders have never experienced an environment where the rate policy changes.
A study by Ned Davis Research shows that a slower pace of hiking [interest rates] could change the outlook for equities and the market could continue rising, provided that the rates hike is at the slow pace promised by the Fed.
The slower the rate of the hike from the Fed, the slower the increases will be in Treasury yields, which means the stock market could digest such increases more easily.
Ed Clissold, a Ned Davis U.S. Market strategist said, “The fact that interest rates are starting at a low level should be taken into account. Even after a few rate hikes, any relative valuation measure would still favor stocks over bonds.”