Skip to content

CONTRIBUTORS

Stephen Dover, CFA

Chief Market Strategist
Head of Franklin Templeton Institute

Taylor Topoussis, CFA

Market Strategist
Franklin Templeton Institute

Originally published in Stephen Dover’s LinkedIn Newsletter, Global Market Perspectives. Follow Stephen Dover on LinkedIn where he posts his thoughts and comments as well as his Global Market Perspectives newsletter.

For the first time since 2023, today the Federal Open Market Committee (FOMC) raised interest rates by 25 basis points (bps). Fed funds futures had implied a greater than 50% probability of a hike since Chair Warsh’s August 28 Jackson Hole speech. With the economy and labor market resilient and inflation stubbornly above the Federal Reserve’s (Fed’s) 2% target, it decided to tighten policy.

What should investors take from this event? Considering today’s circumstances and looking back at the five times (1994, 1999, 2004, 2015 and 2022) the Fed has started a hiking cycle since the Fed began announcing policy decisions in 1994, and the one-off hike in 1997, we believe the following are worth considering:

  • Expect volatility: Across the six prior periods, the average maximum drawdown for the S&P 500 Index in the 12 months after the first hike was -12.2%, led by the -22.8% drawdown in 2022.
  • Look for opportunities: The average three-month return was -2.3%, and the average 12-month return was +8.7%. Given a backdrop of strong earnings growth and a strong economy, we think equity investors should use selloffs to rebalance and add diversified equity exposure.
  • Watch for higher yields: While on average, yields tend to rise in the lead-up to a Fed rate hike, the 10-year US Treasury yield has also risen an average of 26.5 bps in the 12 months after. Given attractive starting yields today (unlike the low-rate environment in 2022), we think bonds are still attractive. We have favored shorter- duration bonds, but higher rates today and potentially higher rates ahead mean that core and core plus bond mandates are also becoming attractive.
  • The duration of the cycle will matter: We believe the economy and companies can stomach some increase in rates. If the Fed enters a prolonged hiking cycle and pushes rates to the point of breaking things, as occurred at the end of the hiking cycles that began in 1999, 2004, and 2022, then investors will need to remain more nimble. While unknowable at the time, the 1997 one-off hike was followed by a 12-month S&P 500 Index return of 39.8%.
  • What comes next for the Fed? The FOMC has two meetings remaining this year; one is in the last week of October, which lands the week before the US midterms, and the last one of the year takes place in the second week of December. The Summary of Economic Projections (SEP) indicates that participants expect one more rate hike in 2026. At the press conference Chair Warsh provided little guidance on future policy, although his comments, coupled with the SEP, were viewed as hawkish by markets.

Source for all data cited: Bloomberg; Analysis by Franklin Templeton Institute. . Past performance is not an indicator or a guarantee of future results.

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal.

The allocation of assets among different strategies, asset classes and investments may not prove beneficial or produce desired results.

Diversification does not guarantee a profit or protect against a loss.

Equity securities are subject to price fluctuation and possible loss of principal.

Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.

 

This document is intended to be of general interest only. This document should not be construed as individual investment advice or offer or solicitation to buy, sell or hold any shares of fund. The information provided for any individual security mentioned is not a sufficient basis upon which to make an investment decision. Investments involves risks. Value of investments may go up as well as down and past performance is not an indicator or a guarantee of future performance. The investment returns are calculated on NAV to NAV basis, taking into account of reinvestments and capital gain or loss. The investment returns are denominated in stated currency, which may be a foreign currency other than USD and HKD (“other foreign currency”). US/HK dollar-based investors are therefore exposed to fluctuations in the US/HK dollar / other foreign currency exchange rate. Please refer to the offering documents for further details, including the risk factors.

The data, comments, opinions, estimates and other information contained herein may be subject to change without notice. There is no guarantee that an investment product will meet its objective and any forecasts expressed will be realized. Performance may also be affected by currency fluctuations. Reduced liquidity may have a negative impact on the price of the assets. Currency fluctuations may affect the value of overseas investments. Where an investment product invests in emerging markets, the risks can be greater than in developed markets. Where an investment product invests in derivative instruments, this entails specific risks that may increase the risk profile of the investment product. Where an investment product invests in a specific sector or geographical area, the returns may be more volatile than a more diversified investment product. Franklin Templeton accepts no liability whatsoever for any direct or indirect consequential loss arising from use of this document or any comment, opinion or estimate herein. This document may not be reproduced, distributed or published without prior written permission from Franklin Templeton.

Any share class with “(Hedged)” in its name will attempt to hedge the currency risk between the base currency of the Fund and the currency of the share class, although there can be no guarantee that it will be successful in doing so. In some cases, investors may be subject to additional risks.

Please contact your financial advisor if you are in doubt of any information contained herein.

For UCITS funds only: In addition, a summary of investor rights is available from here. The fund(s)/ sub-fund(s) are notified for marketing in various regions under the UCITS Directive. The fund(s)/ sub-fund(s) can terminate such notifications for any share class and/or sub-fund at any time by using the process contained in Article 93a of the UCITS Directive.

For AIFMD funds only: In addition, a summary of investor rights is available from here. The fund(s)/ sub-fund(s) are notified for marketing in various regions under the AIFMD Directive. The fund(s)/ sub-fund(s) can terminate such notifications for any share class and/or sub-fund at any time by using the process contained in Article 32a of the AIFMD Directive.

For the avoidance of doubt, if you make a decision to invest, you will be buying units/shares in the fund(s)/ sub-fund(s) and will not be investing directly in the underlying assets of the fund(s)/ sub-fund(s).

This document is issued by Franklin Templeton Investments (Asia) Limited and has not been reviewed by the Securities and Futures Commission of Hong Kong.

Unless stated otherwise, all information is as of the date stated above. Source: Franklin Templeton.

CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.