The 1st Fed Rate Hike: 5 Charts Show the 1st Fed Rate Increase Has NOT Been A Showstopper for Investors

In 2016, for the first time in nearly 9 years, the Fed raised its short-term borrowing rate.

History may hold valuable clues for investors who are looking to understand what a rate hike may mean for them.

The bottom line is that while a rate hike may mark a turning point in policy and create volatility, it hasn’t historically been an inflection point for investment performance. Instead, the first rate hike has most often come during the mid-phase of the business cycle, a period when most investments have produced positive performance. 

Here are some key lessons from the past, based on analysis from Fidelity’s Asset Allocation Research Team (AART). For all the charts that follow, it is worth noting that these results are averages, and in each instance of rate hikes, markets behave differently.

1. Stock gains continue after initial rate move.

While rate hikes may cause volatility, the first rate hike usually takes place during the mid-phase of the business cycle, when profits are strong and the economy is growing. Despite the rate hike, stocks have averaged double-digit gains in the year before and after the first Fed move.

Read the remainder of the report here...

5 Charts Show the 1st Fed Rate Increase Has NOT Been A Showstopper for Investors

How The Fed's Interest Rate Increases Will Affect Your Investments...

Outlook for The Bond Market in The Current Climate

What to Do When Fed is Looking to Raise Rates

Emerging Markets Review

Clues to The Market's Next Move

Where Does The Fed Go Now?

Fed Raises Rates: What’s Next?

In mid-December, the Federal Reserve announced the first rate hike in nearly 10 years. Here are four things to keep in mind.

1.	The first rate hike usually indicates economic improvement, not an imminent market downturn.

It’s important to keep in mind the context of today’s action. Historically, the first Fed hikes have not precipitated economic or market downturns. Typically, the first rate increase has been a signal that the economy has gained traction, and on average, asset markets have typically performed relatively well in the year or two after the first hike.

2.	This round of rate hikes may be gradual.

This round of rates hikes is starting as the Fed faces a far weaker backdrop for global growth—as well as much lower inflation—than is typical for the first rate hike in a cycle. This would seem to imply the Fed will move forward at a gradual pace of tightening. This weaker global and inflation environment makes a dramatic spike in interest rates less likely.

3.	Higher rates could pressure commodities and emerging markets.

It is important to keep in mind that Fed monetary tightening does tighten global dollar liquidity as well. Because the dollar is the world’s reserve currency, this tighter liquidity has made it more difficult for many asset prices in recent months—including emerging-market equities, non-U.S. currencies, and commodity prices. These markets may remain volatile in the aftermath of the Fed’s first hike.

4.	The economy could stabilize.

Finally, our outlook is that the global economy will digest the Fed hike over the coming months. The rate increase may even boost confidence in the U.S. economy by reassuring us all that we are finally on a path to normalization. And with the U.S. still in a steady mid-cycle expansion, we expect the global economy to stabilize over the course of 2016. Markets are likely to be choppy, but overall I think the outlook for equities should be relatively favorable as the year unfolds.

https://www.fidelity.com/viewpoints/market-and-economic-insights/fed-raises-rate?ccsource=email_weekly

© 2015 These presentations are provided for informational purposes only. Read relevant legal disclosures.

A Tale of Two Economies...

GDP Forecast: UGH!

The People Who Nailed The Horrific Q1 GDP Number Have Bad News About Q2 

The Atlanta Fed nailed US gross domestic product in the first quarter.

On Wednesday, we learned that the US economy grew by just 0.2%, far below the consensus forecast among economists for 1% growth. Of the 86 economists surveyed by Bloomberg, only four estimated that GDP growth would be 0.2% or lower.

The Atlanta Fed had long forecast 0.2% growth before revising it down to 0.1% after last Friday's durable goods report.

And just a day after the disappointing Q1 GDP release, the Atlanta Fed has news about Q2: the economy will grow by just 0.9%, according to their latest forecast. Here's what they wrote in a post on their website:

"The initial GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2015 was 0.9 percent on April 30. 

Real GDP grew 0.2 percent in the first quarter, according to the "advance" estimate from the U.S. Bureau of Economic Analysis, 0.1 percentage point higher than the GDPNow model nowcast."

Economists noted that the winter weather, West Coast port strikes, and lower energy prices slowed down the economy — all temporary factors.

Still, for a sense of how gloomy the Atlanta Fed's forecast is, Bank of America Merrill Lynch is forecasting 3.5% growth. Goldman Sachs is forecasting 3.0% growth.

Wage Growth Metric is Precisely Where It Was the Last Time the Fed Started Hiking Rates...

This Wage Growth Metric is Exactly Where It Was the Last Time the Fed Started Hiking Rates  Wage growth is here. On Thursday, we got the latest Employment Cost Index (or ECI), which climbed +0.7% in the first quarter, beating the estimate for a +0.6% gain. The index climbed +2.2% quarter-over-quarter, and +2.6% over the previous year. That led one economist to suggest that the economy is "beyond full employment."  And Steven Englander, Citi's global head of fixed income strategy, highlights something else that's remarkable about the ECI. "ECI wages and salaries (dark blue) are now exactly where they were when fed funds began to rise in 2004," Englander said. He highlighted this with a chart. Englander notes that while wages were falling then, they are rising now.  The sluggish pace of wage growth is one of the biggest things that has kept the Fed on hold. On Thursday, the ECI, as well as the lower-than-expected initial jobless claims print for last week, signalled more tightness in the labor market. To be clear, Citi's economists are not calling for the Federal Reserve to begin hiking rates in June. Englander only points to it as an "interesting" observation. However, Cleveland Fed president Loretta Mester, said a rate hike next month is still "on the table," according to Reuters.

Historically, What Do Stocks Do Before And After The Fed Starts Hiking Rates?...

Sooner or later, the Federal Reserve will begin normalizing monetary policy, which means higher interest rates are coming.

This has investors rightfully worried because higher rates mean higher interest costs, which should be bad for profits and ultimately stocks.

Deutsche Bank Chief US Equity Strategist David Bianco examined the history of Fed rate hikes and their impacts on stocks.

"Stocks typically sell-off on the first of a series of rate hikes, but the magnitude and duration of the sell-off depend on conditions," Bianco writes. "During early cycle hikes the initial sell-off was generally small, quickly recovered and further S&P gains came in next three months and longer (like 2004, 1983, 1972). But many sell- offs on late cycle hikes became corrections or even bear markets."

Unfortunately, it's only in hindsight do we know where we are in the cycle.

"Determining whether it’s early or late in the cycle is subjective, but the shape of the curve, inflation measures, years since the last recession can help," Bianco said. "Next year is likely another mid-cycle year and we don’t expect a severe S&P reaction to hikes, but the risk is the Fed hikes too late or too little and inflation accelerates requiring the Fed to hike to levels higher than expected."

Bianco's 27-page research note is riddled with exhibits. But we thought this one was pretty elegant.

It's the average price move of the S&P 500 during the 4 months before and the 6 months after the 1st rate hike. It's the average of the last 7 hikes.

It's not the most helpful chart for people who enjoy obsessing over the details. It does, however, show that the general direction of the stock market tends to be up.


Read more: http://www.businessinsider.com/how-stocks-move-around-first-fed-rate-hikes-2014-9#ixzz3EMoczX9P

As Fed's Balance Sheet Explodes, Tapering Nears Zero...

The Federal Reserve Is Abysmal At Forecasting GDP Growth and Inflation...

Quote of The Day: The Fed Is Concerned About A Japanese-Style Economy...

“The Fed outlook was so extreme they have to be worried about a Japanese-style no-growth deflationary environment. ”

Harvard Professor, Niall Ferguson

"The Fed has made it clear they intend to be accommodative and proactive, and now I can assume that 'short' rates will remain effectively zero for three years, rather than a year and a half."

Christopher Molumphy, Chief Investment Officer, Franklin Templeton Fixed Income.

Bond Yields Suggest 60% Chance of Recession...

The bond market indicator that has predicted every U.S. recession since 1970 shows that the economy has about a 60% chance of contracting within 12 months.

Short-term rates have been higher than longer-term yields, or inverted, before each of the 7 recessions since 1970.

“The adjusted curve is giving a powerful signal for an upcoming U.S. recession,” said Ruslan Bikbov, a fixed-income strategist in New York at Bank of America, one of the 22 primary dealers of U.S. government securities that trade with the Fed.

“If that happens, the Fed’s target rate could remain near zero beyond 2014,” more than a year longer than the central bank has indicated, he said in an interview on October 3rd.

Quote of The Day: Japan-Like Economic Growth Ahead?

“It's pretty amazing that the Fed will (keep rates) exceptionally low until 2013,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “They are telling you that we are in a stage of Japanese-like economic growth.”

The Inflation Rate Is Only 1.2%? Say What?

"The inflation rate right now is 1.2% for all goods and services."

-Federal Reserve Chairman, Ben Bernacke, in testimony before the U.S. House Financial Services Committee, March 2, 2011.

According to a recent article on CNNMoney.com, the Fed is currently projecting inflation of less than +2% for each of the next 3 years. Really?

The bar chart above shows the change in the price of several commodities from 2000 to 2010. The majority, if not all of which would be considered by many American's to be "staple" items.

For the group as a whole, the average price increase was more than +100% for the 10-year period, which was an annual increase of about +6.5% per year, more than twice the annual inflation increase the U.S. government has been reporting for the same period!

Has the government been under reporting the inflation figures for the past 10 years? Do you believe that inflation is really running under +2%? The government couldn't be misleading us, could they?

Chart of The Day: Reserve Bank Credit Outstanding - Japan vs USA

The USA's Federal Reserve balance sheet credit explosion, which began soaring in 2008, looks ominously identical to Japan's.

The credit explosion was unable to repair the economic malaise in Japan.

Will it work here in the U.S.?

Don't hold your breath...

No Relief for Yet Housing Prices...

The S&P/Case-Shiller Index of Home Values in 20 cities fell -1.6% from November 2009, the biggest 12-month decrease since December 2009, according to the median forecast of 26 economists surveyed by Bloomberg News.

Mounting foreclosures will probably throw more properties on the market this year, further depressing prices, homeowners’s equity and construction.

The lack of a sustained housing rebound and unemployment above 9% are among reasons the Federal Reserve may refrain from raising interest rates and complete a 2nd round of stimulus that could pump $600 billion into the economy by June. 

“The large overhang of unsold houses will weigh on prices,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. “Housing is lagging the economic recovery. It is one factor encouraging the Fed to remain on the sidelines.”