While not everyone will agree, we could be less than one month away from the US Federal Reserve hiking interest rates for the first time since June 2006.
Some market participants are nervous – it has been over nine years since a rate increase last occurred.
Many involved in the markets have never seen a US rate hike during their careers.
After such a prolonged period with rates at abnormally low levels, there are obvious question being asked over what US stocks will do if the Fed does tighten policy on September 17.
The S&P 500, having hit the ominous low of 666 at the height of the great recession (known as the GFC in Australia), has powered higher over the subsequent six years, putting on a dizzying 215% as of Monday’s close.
It’s been amazing bull market, but is it all about to end?
While the normal disclaimers apply – past performance in not indicative of future returns – based on this chart supplied by Fidelity Worldwide Investments, perhaps the six-year, 215% bull market that began in 2009 may have further to run yet.
It examines the S&P 500 index returns in the year prior to – and following – an initial rate hike from the Fed.
There have been four periods of monetary policy tightening cycles beginning in the US since 1987 – 1988, 1994, 1999 and 2004.
According to Fidelity the average gain in the S&P 500 in the year prior to the start of these tightening cycles was 17%.
While not to the same degree, since September 17, 2014 – potentially the date one-year before the upcoming Fed tightening may begin – the gain on the S&P 500 has been 5.06% so far.
It’ll be some effort to match the previous averages in the month ahead, but the index has moved higher nonetheless.
Looking at the historic 12-month index performance following the start of a tightening cycle, Fidelity note that on each of the past four occasions the index has moved higher, not lower, averaging an increase of 6.8%.
While that bodes well for those who like to look to history to evaluate what will likely happen next, Fidelity point out that US economic growth in the period before and after the Fed began to tighten policy was strong – averaging 4.3% annualised in the 12 months before and 4.2% in the 12 months following.
Heading into the potential start of the next tightening cycle, US GDP is significantly lower than historic averages. The advance GDP estimate for Q2 2015 was 2.3%, near half the historic average seen prior to the last four tightening cycles.
That alone underlines while markets are nervous about what may happen if the Fed hikes rates on September 17, and demonstrates why many believe there is no pressing need for US monetary policy tightening to occur as yet.