MacroResearchBoard

Global Equities And Fed Rate Cycles – January 18, 2022

A just-published report examined a number of key investment issues that have gripped global financial markets in recent times. Bond markets are threatening to riot, with yields flirting with new cycle highs as central banks are sounding progressively less dovish.

The report examined the early stages of Fed hiking cycles, which have often been difficult periods for equities, at least on a short-term basis. Global equities corrected 8-10% or so as the Fed hiked rates in the first-half of the 1970s’, 1980s’, 1990s’ and 2000s’ economic expansions, well before equity bear markets developed toward the end of each of the decades.

Fed policy catch-up means that interest rates will rise relative to underlying economic growth, which is a less favorable climate for equities than has existed since the spring of 2020. Nonetheless, against a backdrop of healthy global economic growth, corporate earnings expectations should trend higher over the course of 2022 (in level terms, even if as the growth rate slows). That should provide a buffer for equities, although still-expensive growth stocks, most notably in the U.S., are vulnerable as the Fed plays catch up.