Not a repeat of 1994

With the US economy going strong and plenty of jobs being created, many analysts have wondered whether the current environment is similar to 1994, when the Federal Reserve raised the federal funds rate from 3 percent in 1994 to 6 percent in 1995. Back then, stock markets around the world fell in reaction to the interest rate hikes. If the Federal Reserve does the same thing again in 2004, many analysts fear that global stock markets would also be badly hit again.

In an article for The Business Times today, R Sivanithy asked "Are markets doomed to a repeat of 1994?". His answer: Not quite.

"Our guess is that rates will probably rise this year, but not by much," he wrote. "The reason isn't because inflation will be contained, but rather because a worried Fed will have to be mindful of the potential deflationary consequences that a series of rate hikes could have on a fragile, post-bubble economy."

Similarly, I had pointed the differences between 2004 and 1994 in my own article Singapore stocks down despite good 1Q results. These differences include the relatively weaker job market and the heavier debt load of households, which suggests that increases in interest rates are likely to be "measured".

However, while Sivanithy is cautious regarding the stock market -- he pointed out that the US market is three times higher now than in 1994 -- I am more sanguine. In 1994, markets had not sufficiently anticipated the interest rate hikes. In fact, as pointed out in my article, markets in Asia had surged throughout 1993. This time, markets are anticipating the interest rate hikes and have fallen even before the first interest rate increase.

So it appears to me that markets have priced in at least some of the interest rate increase. Potential negative surprise from interest rate hikes is much less.

While other surprises cannot be totally written off -- for example further sharp rises in oil prices, a hard landing in China -- I think there is enough evidence to suggest, as I did in my latest article posted earlier today, that "It's still a bull market".