Fed Rate Hike "Unlikely" To Burn Investors

Only two rate-tightening cycles since 1936 would have lost investors money on the S&P 500

Editor, etf.com Europe
Reviewed by: Rachael Revesz
Edited by: Rachael Revesz

Investors are unlikely to lose money if the U.S. Federal Reserve raises interest rates and may even profit, if history is anything to go by, according to industry experts, at a time when all eyes are on the Fed meeting next week.

Paul Jackson, managing director and head of research at ETF provider Source, said at an industry event yesterday that if the Fed raises interest rates, volatility is unlikely to increase – it is cyclical and only tends to spike as we head to recession – and that investors are unlikely to lose money.

“On average you tend to make money while the Fed is raising rates in just about all assets,” he said.

Jackson added that during the 16 tightening cycles since 1936, there have only been two cycles where investors would have lost money on the S&P 500.

The iShares S&P 500 UCITS ETF DIST (IUSA) is up 13.68 percent over five years, but is down around 4 percent year to date after capital markets went into freefall on 24 August.

“Perhaps, even more surprising, is that on only four of these cycles would you have lost money on the 10-year Treasury,” said Jackson. “The perception is that when the Fed is tightening it’s a disaster and you lose money left, right and centre. Historical evidence shows that’s not quite true.”

Jackson told the audience today that investors should only worry about their risk-on assets - those that have a significant degree of price volatility such as oil and currencies - if the U.S. economy loses strength.

Rate Hike Just Round The Corner?

Michael Stanes, investment director at Heartwood Investment Management, forecast the Fed will raise rates in 2015 rather than 2016, and it should not alter the shape of the U.S. economy.

“The impact on market sentiment will be important, however,” he said. “Therefore, we expect the Fed to increase interest rates very gradually which should allow risk-asset markets the stamina to absorb any change in policy stance, although investors should expect periods of volatility.” His view on volatility contrasts with Jackson's.

In light of the potential effect the hike could have around the world and on emerging markets, analysts from UBS wrote in their latest Economist Insights report that the International Monetary Fund (IMF) has “changed its tune” and is asking central banks in the developed world not to raise rates. But the Fed is likely to take little notice of this request.

However, UBS did note that if the IMF’s fear of rate hikes hitting emerging markets is realised, there is the potential threat of a spillover of trouble into the domestic economy in the U.S. and UK.

Peter Perkins, founding partner of The Macro Research Board, commented in its weekly update that the S&P 500 revenue growth has been weak over the past 12 months, but that is set to reverse and is already rebounding.

“Better top-line growth in the U.S. should provide meaningful support to global and U.S. profits,” he said.

Rachael Revesz joined etf.com in August 2013 as staff writer. Previously an investment reporter at Citywire, she has a background in writing content for retail financial advisors and has covered a wide range of subjects in finance. Revesz studied journalism at PMA Media, which has since merged with the Press Association. She also holds a B.A. in modern languages from Durham University, as well as CF1 and CF2 financial planning certificates from the CII.