- Summary: If the Fed raises rates to 5.5% in August or September, interest rates will be close to average US nominal GDP growth over the last four years, of 5.6%. Hong Kong based GaveKal Research points out US interest rates exceeding the 4-year-average GDP growth is a negative leading indicator. Since the key transition mechanism is higher borrowing costs reducing corporate profitability, small companies will fare worse than large companies as they have relatively less cash on their balance sheets and are less able to access new capital.
- Comment on related stocks/ETFs: If you accept this argument (and there are many reasons not to), there's an obvious pair trade: long the S&P 500 ETF (NYSEARCA:SPY), short the iShares Russell 2000 ETF (NYSEARCA:IWM).
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