More than half of global central banks are raising rates, and that’s a problem for stocks


U.S. investors are increasingly concerned about Federal Reserve monetary policy, worried that the U.S. economy cannot handle the tighter financial conditions that the central bank’s recent interest- rate hike, its plans for future hikes and a policy of balance-sheet reduction will realize.

The Fed is often portrayed as going it alone in their policy of promoting higher interest rates, because both the Japanese and European central banks have kept short-term interest rates near zero.

But according to Alejandra Grindal, senior international economist with Ned Davis Research Group, this analysis unwisely ignores emerging market monetary policy, which has also been growing steadily tighter in recent months, to the point that 56% of central banks across the world are tightening policy.

This is the first time since 2011 that more than half of the globe’s central banks were raising rates, up from just 20% tightening a year ago. “Our analysis indicates that global equities tend to underperform when more than half of the world’s central banks are tightening policy,” Grindal wrote.

Indeed, since 1989, global stocks

SPX, -1.00%

DJIA, -1.45%

 have returned 7.9% per year, on average, during periods when less than half of global central banks were tightening. When more than half are doing so, as they are now, the average yearly return is negative 1.2%, according to Grindal.

Emerging-market central banks have been those leading the way in this global campaign for tighter policy, with 60% of them hiking rates, compared to just 41.7% of developed-market central banks. “In 2018 alone, more than 10 emerging economy central banks have moved from easing to tightening, including several large economies such as India, Russia, Indonesia and Turkey,” Grinal wrote.

This is not necessarily bad news for emerging-market stocks

EEM, +1.04%

  themselves, which tend to outperform during tightening cycles, likely because they are coincident with a rising dollar and the top of the economic cycle for developed countries, which provide demand for exports.

Luckily for equity investors, global central bankers haven’t grown so hawkish that it will necessarily trigger a bear market for global stocks. “Severe bear markets in global equities, like those seen in 2008 and 2000, have been associated with around 75% of the world’s central banks in tightening mode,” she wrote. “Fortunately, there’s quite a bit to go before we get there.”

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