History Shows Fed Rate Hike Could Be Good For Stocks: Goldman Sachs

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So why is everyone so worried about the impending Fed rate hike? A new report from Goldman Sachs Equity Investment Research points out that history suggests stocks will do well during the next few quarters preceding and during the Fed’s anticipated mid-2015 rate hike. The general wisdom is that rising interest rates are bad for stocks and low interest rates are good for stocks, but this truism accommodates a plethora of exceptions to the rule.

Last week’s S&P 500 performance

In the September 12th report, Goldman Sachs analysts David J. Kostin et al.highlight that the S&P 500 was basically flat last week. The report also mentions that InfoTech was the best-performing sector at +1.1% for the week, while Energy was the worst-performing sector  at -1.5%.

Fed Rate Hike

S&P 500 earnings and estimates

Goldman’s top-down EPS forecasts for the S&P 500 of $116 and $125 for 2014 and 2015 reflect a projected 8% growth in both years. the bottom-up consensus anticipates a 9% increase in 2014 to $117, followed by a 12% move up in 2015 to $132.

From a top-down perspective, the S&P 500 forward NTM P/E is 16.5x. From bottom-up, NTM P/E comes out to 15.9x, and LTM P/B equals 2.8x.

The GS analysts also forecast that the S&P 500 will trade around 2150 in 12 months (a 7.6% gain from 9/10).

Timing of Fed rate hike

The Fed Open Market Committee meets again on September 16-17. Investors anxiously await the Fed statement and press conference that might reveal the timing of the “first” fed funds rate hike. Goldman Sachs projection fits with the mainstream in anticipating that the first hike will occur in the third quarter of 2015.

Historical data suggests markets will move up

Fed Rate Hike

Fed Rate Hike

Of note, historical data show that S&P 500 rallied by an average of 7% during the six months and by 3% during the three months ahead of the three prior “initial” Fed rate hikes (in 1994, 1999 and 2004). Historical data also that a cyclical positioning strategy outperforms during the three, six, and 12 months ahead of a tightening. Furthermore, low valuation and low momentum stocks typically outperform their high valuation and high momentum peers during these periods.

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