07/01/96 ARE RATE-HIKE FEARS EXCESSIVE?

ARE RATE-HIKE FEARS EXCESSIVE?
Why stock prices may still rise
Concern that the Federal Reserve will soon change course and raise interest rates has begun to spook the stock market. But the belief that such a move would spark a major sell-off are exaggerated, says Leslie Kogod of Capital Investments International Inc.
Kogod's analysis of market moves during the 10 major interest-rate cycles since 1954 shows that in 8 of those cycles stock prices posted above-average gains (up 5.3% on average) in the three months prior to initial Fed tightenings. On the two times the market fell prior to the first Fed funds hike, the declines averaged a modest 1%.
Stock prices did even better in the periods following the Fed's initial rate hikes. In 8 of the 10 cycles referred to above, the Standard & Poor's 500-stock index continued to rise--by an average 5.6% after three months and by an average 8.8% after six months. (On two occasions, the market fell--but by no more than 5% within six months.)
Thus, rather than a response to inflation and overheating, says Kogod, initial rate hikes have usually been an effort to stave off those developments and an acknowledgment that economic growth is good. ``Typically, the periods surrounding first tightenings have carried good returns and remarkably low risk.''
BY GENE KORETZ