Forward guidance should limit damage to equities

“Initially after a rate hike, markets tend to sell off in a moderate fashion and then bounce back, especially when rates rise from very low levels. In thirteen of the last sixteen rate hikes, the market took a dip in the immediately preceding six months. This scenario represents the conditions facing our current market. It is important to distinguish between a rate hike when the market is expecting it, and one where the market is wholly unprepared. The Fed has stated it will raise rates, and a rate hike in the near to medium term should surprise no one. As the Fed wound down QE, it used forward guidance to limit surprises and manage market reactions. The same process is being used to broadcast a rate hike in the near future very clearly and carefully, which should limit the overall potential damage to equities. However… equity valuations are no longer cheap, which means investors must be more selective than they were a few years ago.” (VIEW LINK)

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