Increases in the RPT-GRAPHIC-Fed give rise to a cash claim; only stores game in the city

(Repeats the story of GRAPHIC published earlier on September 24, no change)

By Saqib Iqbal Ahmed and April Joyner

NEW YORK, Sept. 24 (Reuters) – The US Federal Reserve's anticipated interest rate hike this week will make liquidity more attractive in the last decade and end the equity era as the only game in town. .

During this bull market that broke the longest August record, interest rates were so low that most fixed income securities other than bonds with undesirable returns yielded less than the inflation rate or the S & P 500's dividend to stocks, the only asset that has generated a real rate of return, or return on capital adjusted for inflation.

"One of the major influences in the market over the past decade has been that bonds, as an alternative, were virtually off-market," said Jack Ablin, investment director at Cresset Wealth Advisors. in Chicago.

"Historically, there has been a tug of war between stock market investments and bond investments, and since the financial crises, the bond market has had a tussle with one arm tied behind the back," he said.

It can change to change.

The Fed ended its rate suppression regime when it stopped expanding its balance sheet and then began raising interest rates at the end of 2015. Since then, bonds have slowly returned to real returns relative to inflation.

With the anticipated action next week, the species will join the party. A wide range of money market assets should ultimately regain a real return relative to inflation. This will be the first time since the beginning of 2008 that money market assets will generate real returns.

"It certainly gives a boost to the cash flow. This gives a boost to risk aversion, "Ablin said.

As the real rate of return on safer US assets increases, it decreases the attractiveness of riskier assets.

"The asset shortage regime is over. We are now in a safe asset security regime, "said Zoltan Pozsar, an analyst at Credit Suisse Group AG last year.

The stock market, meanwhile, is preparing for the rate hike at a time when the forward price / earnings ratio (P / E) of 17.2 against the historical average of 15 years was not an obstacle there three or five years. yielded a negative real return, but this valuation may now seem a little expensive, especially with the earnings growth expected after this year's extraordinary publication.

S & P 500 earnings growth is expected to peak in this year's cycle, estimated at 23.2%, while growth for 2019 is now estimated at only 10.2%, according to Thomson Reuters data.

"As long as earnings growth is higher than rising interest rates, equities should be fine. If earnings growth slows relative to rising interest rates, then you have a problem, "said Oliver Pursche, chief market strategist at Bruderman Asset Management in New York.

Equity mutual funds posted more than $ 1 billion outflows in the week ending September 19, marking the group's 13th consecutive week of net outflows, according to Lipper data. At the same time, investors have poured money into ultra-short bond funds, indicating an increase in the attractiveness of investments with shorter maturities.

Lipper's net data indicates that the ultra-short bond fund group, used to offset interest rate risk, had net inflows of $ 614 million for the week ended Wednesday.

Even though liquidity is becoming more attractive, analysts do not see equities falling quickly out of favor.

"I think the euphoria around the economy and futures earnings growth is overwhelming this idea of ​​yield comparison that bonds are starting to look more attractive than stocks," said David Lafferty, chief strategist at Natixis in Boston.

"I think investors will have real choices in the second half of next year as yields (bonds) become more attractive and earnings prospects become more fragile," he said.