Rising interest rates are the topic de jour of the coming week.
And there's no paucity of gurus popping the corks on their Genie bottles. Here's one from the recent issue of Barron's, "Rising Rates Spell Stock Trouble."
I have spent a good portion of the past 25 years working with colleagues (most notably Gerald Jensen of Creighton University and Luis Garcia-Feijoo of Florida Atlantic University) to examine empirically what happens to asset classes and sectors under expansive or restrictive monetary policies.
What we have found is that there are very strong patterns of returns related to monetary policy present in the capital markets. Domestic equities perform quite well when the Fed is pursuing an expansive monetary policy, and provide more pedestrian returns in a restrictive monetary environment. This may not be a big surprise, but the magnitude of the return differences is remarkable.
The bad news first: International developed markets have followed the same general pattern as the domestic equity markets. That is, higher returns in expansive periods and lower returns in restrictive periods. It would not have paid an investor to rotate out of U.S. stocks and into foreign developed markets during restrictive periods. This is because the major financial markets are globally integrated, now more than ever before.
The good news is that developing markets show a pattern distinctly different from the U.S. and world developed markets. From 1988 through 2013 (a shorter time period due to data limitations), emerging markets earned 8.5% in expansive periods and 16.5% during restrictive periods. This makes sense in that many emerging market economies are commodity-based. It follows that emerging markets and commodity returns would follow a similar pattern.
The bottom line is that Fed policy has tremendous influence on investment returns, and investors ignore Fed policy at their peril. As Fed liftoff nears, investors would be well served to review their portfolios,. taking the Fed's expected moves as serous threats to their stock market returns
http://www.barrons.com/articles/rising-rates-spell-trouble-for-stocks.
The bottom line is that Fed policy has tremendous influence on investment returns, and investors ignore Fed policy at their peril. As Fed liftoff nears, investors would be well served to review their portfolios,. taking the Fed's expected moves as serous threats to their stock market returns
http://www.barrons.com/articles/rising-rates-spell-trouble-for-stocks.
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