Is Fed rate Hike really creates a recession/ bearish market?
BEARISH OR BULLISH?
It depends on how elevated valuations are at the time rates rise. The higher the P/E multiples overall, the more prices have to correct, and the less margin of safety a stock has. We are at some of the highest valuation multiples in history, so many asset managers are theorizing that the high multiple stocks will be the most severely affected, hence the selloff in those areas. Stocks that have earnings support, pay dividends, and have lower multiples aren't affected nearly as much. Bond yields don't materially start rising until the new rates actually kick in and new treasuries are issued. Rising yields is the primary driver of multiple contraction, since there now is an alternative where there was none (or less) before. As such, the contraction can't be fully "priced in" until those new treasuries are actually available to buy. The Fed tries to give the market ample warning such that the decline is more gradual. Some is getting priced in, but a key portion isn't until those treasuries and other bonds are available.
It depends on how elevated valuations are at the time rates rise. The higher the P/E multiples overall, the more prices have to correct, and the less margin of safety a stock has. We are at some of the highest valuation multiples in history, so many asset managers are theorizing that the high multiple stocks will be the most severely affected, hence the selloff in those areas. Stocks that have earnings support, pay dividends, and have lower multiples aren't affected nearly as much. Bond yields don't materially start rising until the new rates actually kick in and new treasuries are issued. Rising yields is the primary driver of multiple contraction, since there now is an alternative where there was none (or less) before. As such, the contraction can't be fully "priced in" until those new treasuries are actually available to buy. The Fed tries to give the market ample warning such that the decline is more gradual. Some is getting priced in, but a key portion isn't until those treasuries and other bonds are available.
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