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Summary

  • I believe equity investors can tune out the media noise about the Federal Reserve’s short-term interest rate increases.
  • History suggests stocks have generally produced strong gains in past monetary tightening cycles.
  • Watch the dollar for signs of which way the market may be headed.

By Rick Golod

The anticipation of the Federal Reserve's (Fed) first increase to its target federal funds rate has raised considerable debate about what this could mean for the U.S. equity market. Forecasts range from violent correction to middling gains to strong bullishness, leaving investors confused about the prospects for long-term equity portfolios.

While a market correction is possible, history suggests that most of the time stocks fared relatively well.

In fact, in a recent analysis, independent research firm Cornerstone Macro found that in past Fed tightening cycles the U.S. market tended to follow the direction of the dollar.

Stocks gained in previous tightening cycles

Source: Cornerstone Macro LP, April 4, 2014. Past performance is no guarantee of future results. An investment cannot be made directly into an index.

I believe the dollar could be a good indicator to watch as we approach the Fed's first rate hike. Investors should also remember that when monetary policy calls for tightening interest rates it's typically a sign the economy is improving. A stronger economy is likely to bolster corporate earnings, and potentially stock prices.

For a more in-depth look at where I think the market is headed, view my June commentary, "Don't Fight the Central Banks."

Important information

The S&P 500® Index is an unmanaged index considered representative of the US stock market.

About risk

In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.

Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa.

NOT FDIC INSUREDMAY LOSE VALUENO BANK GUARANTEE

Disclaimer: The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor. The opinions expressed are those of the author(s), are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

All data provided by Invesco unless otherwise noted.

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Source: What Happens To Stocks When The Fed Hikes Rates?