In less than a week’s time the US Federal Reserve is likely to increase interest rates or the first time since June 2006.
Investors are nervous about what it will bring, an understandable response given it’s been nearly a decade since a hike last occurred and, as a result, a never before seen event for many in the markets.
What will it do to currency markets, commodities, global growth, companies carrying large amounts of US dollar debts and rates markets — these are just some of the many of the unknowns markets are currently grappling with.
Stocks, in particular, have experienced greater than normal volatility of late, especially outside of the US. Will a US rate hike boost or burn stock market returns should it arrive in the week ahead?
In an attempt to answer that question, many will turn to history as a guide. As the saying goes, history repeats.
According to the chart below, supplied by Goldman Sachs, stock markets outside of the US have little to worry about should the saying hold true. If anything, history suggest that investors outside of the US should be cheering on the Fed given the start of previous rate tightening cycles has corresponded with hefty market gains.
Over a 3, 6 and 12-month basis it suggests that Asia ex-Japan traditionally outperforms in local currency terms, although all regions covered have historically recorded returns in excess of 10% in the 12 months following the first US rate hike.
Even emerging markets, having been trashed in recent years as capital flows moved out of riskier assets as the Fed’s quantitative easing wound down, have traditionally performed well in a post Fed hike world.
History says we should not be worried one iota.
However, just because history says stocks will rally does not mean that the same outcome will arrive in 2016. It’s a very different world today, even compared to a decade ago. The markets are more interconnected than ever, debt levels have increased – particularly in US dollars – with global growth below its historic average.
It’s little wonder that markets are nervous, despite what history tells us. As another famous saying goes, past performance is no guarantee of future returns.
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