How the Stock Market Behaves When the Fed Raises Rates – Statistics from the 1950s


U.S. stocks suffered one of the worst falls of the year last week as the Fed's upcoming rate hike is increasingly scaring investors. However, it is worth remembering that the stock market, on average, continued to show decent growth even in the years when the Fed began to raise rates.

The continued growth of the US economy, the recovery of the labor market, but at the same time, significantly prolonged high inflation rates give the Federal Reserve a reason to scale back its unprecedented cash injection measures, raise interest rates and reduce the liquidity balance.

As central bank tightening weighs on the earnings of many companies, market analysts and investors are now "re-evaluating" the current value of stocks while also choosing stable assets.

Market experts warn of market volatility in the near term, but at the same time, they are convinced that lingering fears about the tightening of Fed policy or the spread of Covid-19 will not prevent the stock market as a whole from ending 2022 in “positive territory”.

Investors should be prepared to fall in the first three months after the rate hike, given the historical data provided by Bloomberg.

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Historical statistics (from 1994 to 2018) of the movement of shares of companies in different sectors of the S&P 500 three months before the first Fed rate hike (black chart) and three months after (pink chart) are given below, according to Strategas Securities.

Thus, the S&P 500 Materials index (commodities stocks included), for example, added an average of 9.3% in the three months before the first rate increase in these four cycles, but fell by 2% three months after that.

It's hard to predict exactly how the S&P 500 will decline this year, but analysts note that unusually weak corrections in the index in 2021 could lead to a bigger pullback this year.

According to Truist Advisory Services since 1954, the historically deepest intra-annual S&P 500 pullback has averaged 13%, with an average total return of 7%.

Stock market forecast for 2022

Since the beginning of 2022, the broad S&P 500 has lost 7.7%, but investment firm strategists on average predict it will end at 4982, up 13% from Friday's close. For comparison, at the end of 2021, the S&P 500 index rose by almost 27%.

Looking at statistics compiled by Truist, US equities have historically performed well during periods when the Fed has raised rates, as a growing economy has positively impacted corporate profits and the stock market.

The following is a historical statistic for the growth of the S&P 500 during periods of Fed rate hikes dating back to 1954.

According to Keith Lerner, co-chief investment officer at Truist, stocks have risen at an annualized rate of 9% over the 12 Fed rate hike cycles since the 1950s, and have generated positive returns on 11 of those occasions. The only exception was the period 1972–1974, which coincided with the recession of 1973–1975.

Thus, if history is cyclical, the US stock market is likely to show a better result at the end of 2022 than at the beginning.

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