https://www.financialsamurai.com/stock-market-performance-during-previous-fed-rate-hike-cycles/
On March 16, 2022, the Federal Reserve approved its first rate hike since December 2018. The Federal Reserve was a little more aggressive than expected, indicating it plans to hike rates at each of the six remaining meetings in 2022.
The assumption now is that by the end of 2022, the Fed Funds Rate will be in the range of 3% – 3.25% to combat 40-year high inflation. However, with the 10-year bond yield below 3%, it’s hard to imagine the Fed can push much higher than 3%. Otherwise, the yield curve will be inverted and cause a lot more panic.
With the way prices for shelter, food, gasoline, and other essentials trending lower, I have my doubts the Fed will continue to hike.
If the Fed follows a gradual 0.5% hike at each meeting, then the impact to borrowing costs won’t be that great. Consumers on variable rates will have plenty of time to refinance to a fixed rate.
Further, Treasury bond yields won’t necessarily follow the Fed Funds Rate higher in lockstep. Therefore, mortgage rates may not go up as much.
In this article, let’s discuss how the stock market has historically performed during Fed-rate-hike cycles. We’ll also look at how specific sectors have performed when interest rates are rising.
Great news! During the previous four rate hike cycles, equity markets ended up performing well over the next 12 months. Good bad 2022 has been pretty bad for stocks so far.
Take a look at this great chart created by LPL Research and Bloomberg. It shows the S&P 500 is positive 50%, 75%, and 100% of the time three months, six months, and 12 months after the first rate hike.
Therefore, based on historical performance, we should stay invested for as long as possible. Tell yourself to hold on for at least a year. Instead of selling stocks during a correction or bear market, buying stocks may be more appropriate.
The only time we should be selling stocks is if we realize our risk exposure is too great. And the only way of really knowing whether our risk exposure is too great is to go through a down market and analyze how you feel.
During up markets, we tend to feel more risk-loving than we really are. It’s easy to confuse brains and courage during a bull market. See how stocks perform under different political presidents too.
Here’s a great chart from Strategas Securities. It breaks down the average annualized return by S&P 500 sector during Fed-rate-hike cycles. Technology, Real Estate, Energy, Health Care, and Utilities performed the best. These sectors outperformed the S&P 500 when interest rates were rising.
Some of you may be surprised the technology sector is the best performing S&P 500 sector during historical Fed-rate-hike cycles. The technology sector is usually more sensitive to rising rates given a higher discount rate reduces the present value of its expected cash flow when conducting a DCF analysis. Technology stocks tend to trade more on future expected earnings, which are more uncertain, versus say, the utilities sector.
However, the empirical evidence shows otherwise.