- Macro Strategist
Skip to main content
- Insights
- Capabilities
- Funds
- Sustainability
- About Us
- My Account
The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
With the first Federal Reserve rate hike expected in March, I looked at US equity market performance in the wake of previous policy lows, as shown in Figure 1. In the three months following the first tightening, we’ve typically seen the broad market weaken and defensive names dominate. Looking further out toward the 12-month mark, total returns have tended to improve.
I think a few details in the table are notable:
I’d also note that defensive sectors have tended to do better in the 12 months after a Fed move than in the 12 months leading up to the move.
With all that said, this expansion is different for a lot of reasons, including the Fed’s use of both balance sheet and interest rates as policy tools, which makes extrapolation challenging.
There has been a lot of interest in bond yield behavior as well, which is highlighted in Figure 2. Yields typically rise ahead of the first rate hike, but then they often move down after tightening begins. This is consistent with somewhat weaker equity returns in the three months after the first Fed move. The exception was 1994, when the rate cycle was continuously revised upwards for a time.
Looking at market pricing of Fed rate hikes and comparing it to prior rate tightening over an expansion, there is room for the terminal rate (how high rates can go over the course of an expansion, as opposed to how much they might rise in the near future) in the US to move higher in the right global environment. Recently, in fact, market pricing for the terminal rate, which had been in the 1.75% – 2.00% range, moved north of 2.00% for the first time, and it could go higher.
The one new variable is that with Fed balance sheet runoff as an additional tool, there could be more of a tradeoff between rate hikes and balance sheet, which deserves monitoring. I continue to watch the shadow rate as a way to put the two together.
In conclusion, the move in real and nominal yields thus far in 2022 is consistent with what we have seen in prior rate tightening cycles. Looking ahead, easing supply-chain pressures should give the Fed some room in the adjustment process. Over time, I would expect some firming in real rates, especially as the starting point is quite low.
Impact investing in emerging markets: Growing opportunities, shifting challenges
Continue reading4 equity themes: Budding opportunities in small caps and more
Continue readingPicking the right building blocks for a climate-aware portfolio
Continue readingURL References
Related Insights
Stay up to date with the latest market insights and our point of view.
4 equity themes: Budding opportunities in small caps and more
Starkly different policy agendas from Biden and Trump are examined in terms of how they may affect the supply side of the US economy.
A turning point for US small caps
Myth busting US small caps: why now could be a compelling entry point for the asset class.
Equity Market Outlook
In our 2023 Equity Outlook, we offer a range of fundamental, factor, and sector insights as we look to 2023.
Will a “Goldilocks” economy be just right for equity markets?
We provide an outlook on the ongoing shift to new investment regime, and the market segments that we expect will most heavily influence global equity performance in the coming year.
What route is right in emerging markets investing?
How can investors find the most compelling opportunities within emerging market equities? Simon Henry and Dáire Dunne explain why they think targeting the economic development opportunity may provide a roadmap for success.
How a thematic approach can help harness change within portfolios
Multi-Asset Strategist Supriya Menon and Investment Director Andrew Sharp-Paul discuss why a thematic approach can help harness change within portfolios against a structurally different macroeconomic backdrop.
Is the long-awaited change in Japan’s fortunes finally materialising?
Portfolio Manager Dan Maguire explores why Japan may finally be exiting deflation and assesses the opportunities this structural change could create for small- and mid-cap equities.
Why investing in themes for EM equities may reap rewards
Portfolio Manager Dáire Dunne outlines why he is increasingly optimistic about the potential opportunities within select EM equity themes this year.
Small-cap value: Strong past, bright future?
While equity markets have had a challenging recent past, history teaches us that there may be several reasons to be optimistic about small-cap value.
Thematic investing focus: The transportation revolution has arrived
New technology and environmental concerns are creating a disruptive force in the transportation sector, leading to supply-chain investments and a host of new addressable markets.
URL References
Related Insights
Japan equity: Reason to believe
Continue readingBy
Toshiki Izumi, CFA, CMA