History tells us that the beginning of a rate hike cycle on the part of the Fed it does not tend to derail the US stock and bond markets, nor the US dollar. However, this does not guarantee that these markets will perform well at the start of the next Fed bull cycle. So Yoram Lustig, Head of EMEA Multi‑Asset Solutions di T. Rowe Price that for nearly 50 years the US stock market has tended to perform solidly after the Fed began a new bull run.
Of the 21 rate hike cycles examined, the US stock market generated positive returns 17 times in the 12 months after the first hike (with an 81% success rate) and 16 times in the six months after the first hike (with a 76% success rate). Since 1984, the success rate is 100%.
While it might seem counterintuitive, rate cuts actually tend to occur in times of weakness, while hikes in times when business is trending upward and inflation is high or rising, says Lustig. If rate hikes continue, however, tighter financial conditions could negatively impact equities. Rate hike cycles can induce solid equity market performance in the first 12 months, but the trend can then reverse if the cycle is prolonged.
Does this mean, continues the expert, that we can expect a positive equity market performance in the year following the start of the next rate hike cycle? Actually caution is needed, since context is important, Lustig points out. For example, one consideration that our analysis does not take into account is the unconventional monetary policy that the Fed has used extensively since the 2008 global financial crisis. The impact of Fed policy on investor sentiment was also not considered. Fed. While Fed rate decisions are very important, the expert concludes, investors should consider other ways the Fed influences the economy and markets, as well as the impact of its policies on sentiment and other factors that they define expectations on market performance.