Wednesday, March 16, 2022
Today the Federal Reserve is widely expected to hike rates for the first time since December 2018 and we expect them to kick things off with a 25 basis point hike (0.25%), with three or four more hikes coming later this year.
What could happen next? “Investors need to remember that Fed rate hikes usually happen near the middle of the economic cycle, with potentially years left of gains in stocks and the economy,” explained LPL Financial Chief Market Strategist Ryan Detrick. “In fact, a year after the first hike in a cycle has been fairly strong, higher a year later the past six times.”
Although last month a 50 basis point hike was priced in by more than a 90% chance according to fed funds futures (it has come down significantly), we remained in the camp the first hike would only be 25 basis points. Look again at the chart above and you’ll see the Fed rarely kicks off a new cycle of hikes with a 50 basis point hike. It is later in the cycle that tends see 50 basis point hikes or larger.
As we share in the LPL Chart of the Day, during periods of extended rate hiking cycles, stocks have done quite well.
Four or five hikes this year sounds like a lot, but expectations are currently for more than six. Remember that we’ve seen many years that saw many rate hikes, as shown in the chart below, even as recently as 2018.
Lastly, here’s how stocks have done in years with a lot of rate hikes. The mid-2000s cycle is what has our attention, as there were 17 total rate hikes in 2004, 2005, and 2006, yet the S&P 500 managed to gain in every year.
The bottom line is rate hikes usually aren’t bearish events and we don’t expect this cycle to be any different.
For more on rate hikes and the latest with Ukraine and Russia, please watch the latest LPL Market Signals podcast with Jeff Buchbinder and Ryan Detrick, as they break it all down.
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