Many investors are worried of equities because the Fed is about to raise rates. RBC Capital Markets did some work on that. When the Fed starts raising rates, it normally is because the economy is accelerating, leading a similar acceleration in corporate profits. Here is RBC’s finding:
We looked at the average and median price path for the S&P; 500 in the months
leading up to and following the Fed’s first rate hike for all occasions back to 1950. The median price path for stocks shows a (modest) correction taking stocks down by < 2% over a three month period.
This is interesting since it takes no account of equity valuations. Based on this chart and using the median line, equities start to rise 9-10 months before the first rate increase. They rise strongly for 5-6 months, then pause 3-5 months before the first increase and 2-3 months after before getting on another strong up leg.
Applying these averages to the current situation, we should be about to enter the pause before the first rate increase, possibly in the April-June period, followed by another 2-3 months of marking time (June-August), before the other up leg in the second half of 2010.
Such a pattern jibes fairly well with my work on valuation which suggests that fair value is pretty close (1235 give or take 5%). To go beyond that, profits have to move beyond $65 on the S&P; 500 Index which may have to wait until mid-year.
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