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15 May 2015
S&P 500 to edge up despite Fed tightening - Capital Economics
FXStreet (Bali) - According to John Higgins, Capital Economics' Chief Markets Economist, the expectation is that the S&P 500 will edge up, rather than plummet, as the Fed initiates its long-awaited tightening cycle.
Key Quotes
"We are sceptical that a further sell-off in Treasuries would drive the US stock market down, as some are suggesting. Although we forecast that the 10-year US government bond yield will continue to climb, our expectation is that the S&P 500 will edge up, rather than plummet."
"In the past quarter of a century, there have been three major tightening cycles in the US, beginning in February 1994, June 1999 and June 2004. On average, the 10-year Treasury yield increased by around 60bp in the four months or so that preceded the first rate hike."
"(Our expectation is that the first hike in the federal funds rate in the next cycle will be in September, which is about four months away.) Yet the S&P 500 climbed by an average of 4% during the same period."
"On average, the S&P 500 also gained nearly 8% in the year and a quarter after the first rate hike in these seven cycles, during which time the 10-year Treasury yield rose by an additional 40bp. (This includes a slight decline in the yield during the last major tightening cycle)."
"This bodes well for the stock market between September 2015 and December 2016, by which time we forecast that the 10-year Treasury yield will have risen to 3%, from around 2.25% now."
"The upshot is that we continue to forecast the S&P 500 to end next year at 2,200, which is only about 4% above its level today."
Key Quotes
"We are sceptical that a further sell-off in Treasuries would drive the US stock market down, as some are suggesting. Although we forecast that the 10-year US government bond yield will continue to climb, our expectation is that the S&P 500 will edge up, rather than plummet."
"In the past quarter of a century, there have been three major tightening cycles in the US, beginning in February 1994, June 1999 and June 2004. On average, the 10-year Treasury yield increased by around 60bp in the four months or so that preceded the first rate hike."
"(Our expectation is that the first hike in the federal funds rate in the next cycle will be in September, which is about four months away.) Yet the S&P 500 climbed by an average of 4% during the same period."
"On average, the S&P 500 also gained nearly 8% in the year and a quarter after the first rate hike in these seven cycles, during which time the 10-year Treasury yield rose by an additional 40bp. (This includes a slight decline in the yield during the last major tightening cycle)."
"This bodes well for the stock market between September 2015 and December 2016, by which time we forecast that the 10-year Treasury yield will have risen to 3%, from around 2.25% now."
"The upshot is that we continue to forecast the S&P 500 to end next year at 2,200, which is only about 4% above its level today."