BlackRock: Fed rate hike is good news, expected ongoing volatility

The Fed's rate hike is good news and a testament to a resilient U.S. economy. BlackRock expects a ongoing volatility, but remember that while rates are no longer at zero, they remain extremely low, and will likely remain low for some time. "We prefer stocks, particularly European and Japanese equities, over bonds, and marketneutral strategies such as long/short equity and credit”, said BlackRock in his Bulletin post-Fed. 
“For the first time in nearly a decade, the Fed raised interest rates, signaling its faith in the U.S. economic recovery and marking an end to a historic period of monetary policy accommodation – the world’s biggest fund manager said in an note – While the decision to raise rates by 25 basis points was widely anticipated, the ramifications and opportunities for global investors are notable. The Fed’s action has garnered plenty of attention, but investors should be aware of what matters most, and that is the path of future rate hikes. The increase in borrowing costs may feel like a seismic change, but that’s primarily because it’s been so long since rates have been increased. View the hike not so much as the Fed slamming on the brakes, but instead taking its foot off the gas pedal. The reality is that, by historical standards, rates are extremely low and are likely to remain so. Indeed, in announcing the hike to a range of 0.25% to 0.50%, the Fed said it expects rates to stay subdued, and that the hiking cycle will be gradual. High debt levels, questionable productivity growth, slow economic growth, aging populations, strong demand for high-quality assets and ongoing easy monetary policies elsewhere around the world will all likely contribute to keeping a lid on rates even as the Fed normalizes its policy. And the gradual nature of the tightening cycle should allow markets to absorb the increases with relative ease”.
BlackRock added that It’s also important to remember why the Fed is comfortable taking this action. Today the U.S. economy is showing further signs of life. The most recent employment report, for instance, showed the U.S. economy created more than 200,000 net new jobs in November, while the unemployment rate held steady at just 5%. “Of course, as we’ve witnessed throughout 2015, financial markets are not immune to bouts of volatility – adds BlackRock – as evidenced by the recent tumult in high-yield markets. Economies outside the U.S. continue to struggle, and emerging markets are likely to remain under pressure, although some adjustment has already occurred in anticipation of rate normalization. Equities may also find it difficult to advance in the face of an appreciating dollar and stagnant corporate earnings, placing greater import on investment selectivity. And while we do anticipate the Fed will be gradual in bumping up rates, there can be no guarantees about the pace of increases and the final fed funds rate once central bankers are done. Overall, investors should view the rate hike for what it is: good news and a testament to a resilient U.S. economy. Expect ongoing volatility, but remember that while rates are no longer at zero, they remain extremely low, and will likely remain low for some time. We prefer stocks, particularly European and Japanese equities, over bonds, and marketneutral strategies such as long/short equity and credit”.  
 

Source: BlackRock