Separating Wheat from Chaff

CIO letter» |

July 31, 2013

Focusing on the last 5 major tightening cycles and looking at the impact on the U.S. equity market, we see that the effect of interest tightening on the S&P500 has not been dramatic. Apart from the initial response (usually negative), the S&P500 was able to offset the initial setback – on average lasting 2 quarters (the worst case was 5 quarters in the 70’s) and in all of the 5 cases that we surveyed it ended up scoring gains at the end of the tightening cycle. The point we want to make with this analysis is that equities may be able to withstand a “good” increase in interest rates, which is led by expectations of improved economic prospects, as opposed to a “bad” increase, led by rising inflation expectations.


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