Chart of the week - The Fed vs the stockmarket

Fed sweet spot indicator: Rate hikes, all else equal, tend to be bad for risk assets in that it incrementally removes monetary tailwinds, raises the discount rate used in valuations, reduces the equity risk premium, raises the odds of a recession, and overall — sends a signal to investors that the game is changing.

But context matters: rapid wage growth provides some offset, and based on recent history (in the chart below) it looks like the Fed could hike multiple times before pushing the market over. Indeed, the gap between the Fed funds rate and wage growth has only widened further in recent months.

That said, volatility has increased recently as the market wakes up to the reality that monetary policy will eventually be tightened (the signal has been sent!). Meanwhile, valuations are tracking at expensive levels vs history and vs global peers. So it ends up being a case of proceed with caution (a keen eye on risk management and paying close attention to the signals and signposts!).

Key point: The Fed can probably hike multiple times before sinking stocks.