By Matt Phillips
It’s always interesting to hear a little bit about what the markets watchers at Goldman Sachs are hearing from their well-heeled clients. Comments from David Kostin suggest that the market is most concerned about what change in stance at the Fed will mean for the stock market:
Foremost among the concerns expressed by equity fund managers during our recent meetings is the risk of higher interest rates. Bears argue that $600 billion of planned Fed bond purchases under QE2, if they end as scheduled in June, will cause long-term interest rates to rise and spark a sell-off in US equities. Investors also fear rising U.S. inflation data and forward-looking inflation expectations will prompt the Fed to raise shortterm interest rates before year-end.
From Goldman’s perspective, how stocks fare depends on why rates are rising. If they’re rising in an effort to tamp down on inflation, i.e., the Great Volcker clampdown, when Fed Chairman Paul Volcker’s squeezed inflation out of the U.S. economy by gradually raising the Fed’s benchmark federal-funds rate to 20% in 1981. Of its look back on how stocks fared in rising rate environments: “Defensive sectors led the market when both interest rates and inflation rose while cyclical equities outperformed when rates rose without an inflation impulse.”