How do US stocks react to the Fed's rate hikes?

The S&P 500 has just recorded its worst start to the year since March 2020 (when the epidemic began to hit the US) and now investors must face rate hikes from the Fed in the near future. next.

Over the past two years, the US stock market has surged despite the economy facing the worst global epidemic in a century, one of the most divisive US presidential elections. Now they face a Russia-Ukraine war, the highest inflation in nearly 40 years and upcoming rate hikes from the Fed.

The following is the performance of the US stock market before the Fed's previous interest rate hikes.

History of interest rate hikes

History shows that US stocks are more volatile after interest rate hikes. However, that doesn't mean the uptrend is over. In fact, in the eight rate hike cycles, the S&P 500 was higher one year after the rate hike, according to LPL Financial.

Industry developments

Over the past three decades, the Fed has made four rate hikes. None of this caused the US stock market to plummet. And technology is often the best performer throughout these cycles, with gains of nearly 21%, according to Strategas Securities. Overall, however, the industry group that leads varies from cycle to cycle, and no group leads all four cycles, the data show.

Oil shock

Oil price shocks combined with interest rate hikes often negatively affect the market's momentum. The Fed is currently facing a dilemma, with soaring crude prices and the Russia-Ukraine war possibly boosting oil prices further. Oil price shocks often precede recessions in the mid-1970s, early 80s, and early 1990s. However, other recessions – such as 9/11/2001 and the Great Depression 2008 global financial crisis – not directly from the sharp rise in oil prices.

Ups and downs ahead of midterm elections

And yet, investors face another challenge in 2022: The midterm elections in November 2022. Markets often fall initially because of uncertainty about the outcome and the accompanying effects of policy changes. However, the stock market usually rallies later that year. Overall, midterm election years typically see the biggest declines of the year, dropping more than 17% on average, according to LPL Financial. This quarter and the next two quarters are often among the quarters that the US stock market has performed the worst in a 4-year presidency.

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