FOMC: Rate hike effect on markets – Charles Schwab

In view of analysts at Charles Schwab, rate hikes don't have a uniform effect across financial markets as rates tend to rise when the economy is improving, and a strong economy is also good for stocks.

Key Quotes

“As a result, the S&P 500® Index historically has risen during rate-tightening cycles. That said, stocks tend to suffer when rates get too high and the stock market generally doesn't like surprises, so if it looks like the Fed is gearing up to boost rates more quickly than expected, things could get bumpy.”

“It’s a little different in the bond market. How a bond a reacts to changes in interest rates depends in part on its duration. In general, shorter-duration bonds tend to react less dramatically to rate hikes than longer-duration bonds.”

“For that reason, given the likely trajectory of interest rates, it could make sense for investors to consider keeping the average duration of their fixed income portfolios in the short- to intermediate-term range—say, three to seven years for Treasury securities and investment-grade bonds, and five to 10 years for municipal bonds. Prices for such bonds could still swing, but likely not by as much as for bonds with even longer durations.”

“For investors who are uncomfortable with any volatility, short-duration-only could be an option.”