Page 5 - ISQ July 2022

INVESTMENT STRATEGY QUARTERLY

Average GDP Before and After the Fed Starts Hiking

2.0% 100%

95%

1.5%
90%

85%
1.0%
80%

75%
0.5%

70%

0.0% 65%
-36 to -24 -24 to -12 -12 to 6 -6 to 0 0 to 6 6 to 12 12 to 24 24 to 36

Months
Average Real GDP Growth Leading Into/Following First Fed Rate Hike (Le ) % of Time Positive (Right)

Source: FactSet, as of 21/06/2022

inflationary pressure significantly above target. Over the summer been positive 71% of the time 12 months following the first
months, inflation is likely to roll over in Europe as in the US, but Fed rate hike. The same is broadly true of UK and European
monetary policy should remain on a tightening path for the rest of equity benchmarks too. On the other hand, taking the US as an
the year and into next year, if the current assessment of rates is example, average real gross domestic product (GDP) growth
not modified in coming policy meetings. leading into the first Fed rate hike has been positive and
growing up until the first rate hike (with some uncertainty
While we don’t expect that the US will enter a recession this leading up to it), and then steadily slowing down on average
year, it is important to consider what a potential recession over the next 36 months. While a negative GDP reading is not
could look like, if one were to occur (particularly given the ideal, it is important to note that historically it remains positive
increased likelihood of recession in Europe). Tightening cycles more than 85% of the time in the three years following the first
have historically dampened economic growth, and rate hike. While all four components are important, consumption
consequently investment returns. However, it is important to
remember that the economy and the stock market, while
connected, are not the same thing. In fact, equity markets
measured by the S&P 500 Index have had, on average, negative “ Recessions do not start with the
performance in the three months following the first Fed rate consumer, but rather with a slowdown
hike, but tend to have positive but relatively muted or a decline in private investments. ”
performance after that. Most importantly, the S&P 500 has

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