Robeco: „Zinserhöhung muss Bullenmarkt nicht beenden”

The US Federal Reserve (Fed) last month outlined the criteria for the first rise in the key US borrowing rate since 2006, leading many investors to expect it in the third quarter. It follows increasingly positive signs that the world’s largest economy is growing while inflation remains benign.

In theory a rate hike is bad for stocks, as it raises the borrowing costs of companies while reducing the spending power of consumers. It’s also theoretically bad for bond returns, as bond yields would rise and bond prices, which move inversely to yields, would fall.

Some strategists subsequently expect the immediate end of equity and bond bull market rallies that have produced strong returns for years. However it doesn’t necessarily have to be that way, says Daalder.

No need to panic

“If you had expected the markets to panic on the news that the Fed was on the verge of raising its official target rate for the first time in over nine years, you would have been mistaken,” he says.

“Strong growth figures, a strengthening labor market or higher inflation will trigger an earlier rate hike, and could therefore be seen as negative news for financial markets moving forward. But should it be seen like this? Is a rate hike indeed such a bad thing for financial markets?”

Daalder says investors should answer the question by looking at the rationale behind a rate hike, and then analyzing data to see what happened in the past. Data going back to the 1970s and 1980s shows that stocks wobbled at first before returning to normal, while government bond yields did not rise as expected, and the impact on the credit market was negligible.

Is a rate hike negative news?

“In theory, higher interest rates have the effect of slowing an economy down,” he says. “Consumers would save more and spend less. Companies could be forced to scrap investment projects and reduce debt, while governments could be faced with higher financing costs, triggering spending cuts.”

“Stocks could be hit by a lower earnings outlook; corporate bonds could feel the pain from potentially higher defaults, and commodities may decline due to lower end-demand. Higher rates can lead to higher bond yields and therefore initially lower returns,” Daalder says.

“So much for theory though… the real world can turn out to be a bit more complicated than that. For one, rates are not raised without a reason. Normally, higher rates are a sign of a positive economic environment, meaning strong demand, an improving earnings outlook, and overall positive sentiment.”

“And so given that sentiment is an important driving force for financial markets, a rate hike does not necessarily have to be seen as all that negative. Much will depend on the circumstances that surround the rate hike and the expectations moving forward.”

Results from the past

Daalder says data for the major markets of the US, Germany, Japan and the UK do not bear out the theory that a rate hike must be bad. His team’s research identified 29 rate hike cycles since 1971 and then specifically looked at what happened to asset prices in the period of 90 days prior to the first rate hike and the 200 days that followed.

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