AMP Capital chief economist Shane Oliver said rising rates will likely impact shares in a similar way as tapering did in the middle of last year.
“However, the historical experience tells us that the start of a monetary tightening cycle is not necessarily bad for shares,” said Mr Oliver.
While the reaction after three months is generally mixed, with shares either up or down, after 12 to 24 months a “positive response dominates”.
“In the early phases of a tightening cycle, higher interest rates reflect better economic and profit growth; it’s only as rates rise to onerous levels to quell inflation that it becomes a problem, but that’s a fair way off,” he said.
Mr Oliver said it is also important to note that the rally in shares over the past five years is not solely the result of easy money.
“It has helped, but the rally has been underpinned by record profit levels in the US,” said Mr Oliver.
The impact of quantitative easing will also be only temporary, Mr Oliver believes.
While the end of the first quarter in March 2010 and the end of the second in June 2011 were associated with 15 to 20 per cent falls in the market, Mr Oliver said this was at a time when the “US economy was weaker and global confidence was hit by the eurozone crisis”.
“Now the US economy is on a sounder footing,” he said.
Mr Oliver believes that tightening will be gradual, given the “constrained global economic recovery” and the fact the US economy is a long way from “tight monetary conditions that will seriously threaten the cyclical rally in shares”.
“Just remember that the Fed is only edging towards rate hikes because the US economy is stronger and so it can now start to be taken off life support,” he said.
“After the efforts of the last few years, the last thing the Fed wants to do is to knock the economy back down again.”
