Moody’s: US rate hikes could ‘pummel’ stocks
The warning comes after the Dow Jones index of the largest industrial shares in the US this week passed through the 20,000 level for the first time.
US stocks have climbed sharply since the election of Donald Trump in November, as the new president has pledged on the campaign trail to spend big on rebuilding America’s dilapidated infrastructure.
Many analysts also predict that President Trump will carry through some sort of “reform” of US taxes which means the administration will cut corporate taxes. Lower US taxes could also boost the payouts made by US companies to shareholders.
However, John Lonski, chief economist at Moody’s Capital Markets Research, warned about underestimating “the power of sharply higher benchmark interest rates to pummel share prices”.
Reviewing the history of US market sell-offs, Mr Lonski wrote that “interest rate risk now poses the biggest danger to stocks”.
“Granted today’s overvaluation falls considerably short of the excesses of late 1998 through early 2000, buying into an overvalued market necessarily entails above-average risk,” he wrote in Moody’s review of credit markets.
Capital Economics in London said yesterday that it expects US interest rates “to rise sharply”.
“The widespread pick-up in activity and rebound in inflation in advanced economies during recent months has reduced the pressure for central banks to ease policy further. “But only in the US do we expect interest rates to rise sharply,” the economists said.
