Yahoo Finance’s Myles Udland, Brian Sozzi, and Julie Hyman discuss what Fed rate hikes mean for stocks.
JULIE HYMAN: We begin today with the Morning Brief, which has to do with a lot of these sort of data crosscurrents that we've talked about recently, including, of course, that on inflation and what it means for the Federal Reserve. What's going to happen with rates. And then, as a result, what's going to happen with stocks.
And there's a good reminder in this Morning Brief, Myles, that even when rates go up, stocks can still go up. It sort of depends on where in the rate increase cycle we are. But even the talk about inflation going higher and rates going higher, doesn't necessarily mean that stocks are going to go down.
MYLES UDLAND: Yeah, and look, very sad Morning Brief. This is Sam Ro's final as my co-author here at Yahoo Finance. And everyone who knows Sam's kind of approach to markets, which I have adopted as two of us have worked together over the last seven years, is ultimately, you need to provide a reason why stocks are not going to go up, because the thrust of history suggests that over time, and of course, over every 20-year rolling period for the last century plus, stocks are positive over that interval.
And so, the latest debate today is around inflation and what it's going to mean for Fed policy. Of course, whether inflation forces the Fed to begin tapering its asset purchases sooner rather than later is really the hot topic. And I know we'll talk about that with Brian Cheung in just a bit. But what this really leads to is, when does the Fed begin raising interest rates?
And all else equal, higher rates are more challenging for stock investors to justify higher valuations. You have more competition from other assets that are going to earn a higher return if the benchmark interest rate is set higher. But some data from Jonathan Golub over at Credit Suisse, which Sam cites in today's letter, shows that when the Fed begins raising interest rates, that does not reflexively mean that the equity bull cycle, or any equity rise, is out of the question.
In fact, over the two years that follow the Fed's first rate hike in any rate hiking cycle, the S&P 500 tends to be up-- let's see the data here-- right around 28%. And over the three-year period that follows that beginning of the rate hiking cycle, the S&P 500 is up about 35%. Now, this is looking at the last four rate hike cycles.
People who know their market history, these years, of course, proceed very interesting times for markets, '94, '99, '04, and 2015. Of course, after 2015, we had Trump elected, then the tax cut rally, 2017, one of the great years of the last bull market really, '13, '17, '19, the standouts at the end of that bull run. You look at 2004, right, that's moving us right into the teeth of that final rally before we got the financial crisis.
'99, sneaky good year for the market. S&P was still up about 20% right ahead of the peak of the tech bubble. And of course, 1994 when you had the taper tantrum, the bond tantrum that everyone in fixed income still remembers that preceded both Alan Greenspan's talk about irrational exuberance and also one of the great five-year market rallies of all time.
And so, all these things are just a way of reminding yourself that the general trajectory of the stock market, the US equity market, in the last 70, 80 years has been up and to the right, with fits and starts. I think we learned that lesson all quite well in a new way in 2020. And that as we begin to talk about the next phase of the cycle for the Fed, it is a reminder that while those regimes may create more questions or more challenges for the stock market, typically, the US market has overcome those and moved higher through time.
BRIAN SOZZI: Myles, just got my hands on a good note from the folks at Evercore ISI. They're noting market-based Fed funds futures prices have been almost entirely unchanged during the past two-- or after the past two CPI reports. You look at the 10-year, it's barely moved, a little over 1.4%. I don't know your thinking on this, But at least to me, Myles, that suggests that the market believes, yes, what the Fed has been selling, in terms of inflation being transitory.
MYLES UDLAND: I think that, and I think it is also yet another reminder that when we are talking about what the market is pricing today, we're talking about the future. In the winter, when rates were backing up rapidly, the market was pricing in this period of higher inflation. We sit here today and the market is looking at inflation dynamics, used cars, airline tickets, these are things that are clearly transitory as they respond to one-time events.
And so, the market looks forward, and says that 1 and 1/2 percent today, do I need to ask for a higher yield on the 10-year? Basically, do I need to price in more rate hikes? And the bond market digested that initial back up, that initial sell off in the winter, and sits here today, and says, you know, I think in the future, we are not going to see inflation, and we're not going to see rates rise at a faster rate than we have already anticipated.
And so, you know, it's a reminder, why is the stock market been flat over the last several months? It's because investors aren't sure that earnings growth is going to continue to get-- to continue to get even better in the years ahead. Now, we're talking 2022, 2023, and also that the multiple on the stock market may not expand over that time frame. Again, 12, 18 months out. So, always a reminder that the market is looking far forward-- you know, a lot more into the future than I think we kind of keep in mind here on a daily basis.