Here's why US stock investors shouldn't fear a Fed rate hike

CHICAGO, IL – DECEMBER 31: Traders and clerks at the CME Group toss confetti to celebrate the final trading session of the year December 31, 2010 in Chicago, Illinois. The U.S. stock indices posted positive returns for 2010 with the S&P, Dow and Nasdaq on pace to close the year up over 10 percent. (Photo by Scott Olson/Getty Images)

There is no need to fear a Fed rate increase, it may actually be the start of another leg higher for US stocks.

That’s the view of UBS strategists Julian Emanuel, Omar Elangbawy and Sibi Gnanasundaram, who suggest that rather than pressurising stocks as many in the markets currently predict, it may help to underpin the rally in US stocks.

In a note released earlier today the trio note that Fed tightening cycles that begin during period of low inflation and rising wage growth “tend to be very good news for stocks”.

They point to the table below as evidence to back their call.

As you can see, when rising wage growth has accompanied low inflation at the start of a Fed tightening cycle, it has traditionally corresponded with strong gains in US stocks.

Like on previous occasions, they expect the start of the Fed tightening cycle, presuming it occurs this year, will be bullish for stocks.

“We expect increased interest rates driven by strength in wages to underpin, rather than restrain, equity market gains in the months to come. History shows that Bull markets continue on average for two years and 33% higher after the first Fed rate hike. It’s not likely to “be different this time” in our view”.

Based on the table below, it’s clear history is on their side.

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