AllMarket Outlook
logoArgusMay 22, 2023

Daily Spotlight: Stocks May Take Off Post Rate-Hike Cycle

Market Outlook
Bearish - Short term

The Fed's rate-hike cycle of 2022-23 may be over. Between March 2022 and May 2023, the Fed hiked rates 10 times. Compared with recent rate-hiking periods, the cycle was shorter than average and packed in a larger average cumulative hike. We count seven meaningful rate-hiking periods since 1980. Over most of them, stocks absorbed and adjusted to higher rates without much turmoil. Relatively speaking, several rate cycles from 1980 through 2020 required only modest tweaks by the Fed. The stock market struggled during the 2022-23 rate cycle mainly because the Fed's actions were intense, in response to inflation that took over like a wild fire. One positive from past rate-hiking cycles is that when they are over, the stock market usually is in a good mood. We studied stock-market performance during the seven periods of rising federal funds rates since 1980. These occurred in 1983-84, 1988-89, 1993-95, 1999-2000, 2004-06, 2016-19 and 2022-23. On average, these periods lasted about 18 months. The average change over the cycle was a cumulative hike of 320 basis points. The fed funds rate at the end of the cycle averaged 6.7%, well above the 4.5% average federal funds rate since 1980. So then what happens? Our study found that stocks generally perform well once the rate cycle ends. The average performance for the S&P 500 in the six months after the end of rate-hike cycle was 11.6%, which translates to an annualized return of 23.0%. Among the prior six cycles, stocks declined only once over the following six months; that was in 1999-2000, ahead of the "dot-com" implosion. The market's big sigh of relief when the Fed is finished, it seems, puts powerful wind in the sails of the stock market.

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