Don’t Wait For Fed: Fed Raising rates 48% of periods since 1954 and equities often turn 6M before last “hike”

Investors remain broadly cautious on equities. This is completely understandable given the carnage in markets this year, along with the great uncertainties associated with the trifecta of rising inflation, Russia-Ukraine war and “negative shocks” delivered by Fed hawkish policy. But as a counterpoint, one can be constructive if one believes some combination of below:

  • inflation proves to be less “sticky”
  • economic resilience is better than feared (“growth scare” not recession)
  • US economic dominance gained in 2022
  • bad news is baked into equity valuations
  • cash is on the sidelines

We have maintained a “2H rally” perspective as we basically believe all 5 of the above are true. And this is the central reason we remain positive on stocks, despite the Fed continuing to talk tough on inflation and the fact that Fed might be raising rates for an additional 6 months:

  • Fed raising rates is not a binary impact on markets that stocks have to fall
  • the key is whether Fed will negatively “shock” markets
  • In 2021, bond markets were ahead of Fed in anticipating “rapid rate hikes”
  • Since June 2022, bond markets are ahead of Fed in anticipating “getting to Neutral” far sooner
  • 10-year at 2.7% is a 37X P/E for bonds, so should equity P/E really need to fall to 15?
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