The Fed’s 3 rate hikes won’t stop the S&P 500’s uptrend

The Federal Reserve’s last monetary policy meeting of the year revealed that its chairman, Jerome Powell, and the rest of the senior officials of the US central bank are ready to tackle mounting inflationary pressures. Telegraphing three rate hikes next year to the marketInvestors did not react grudgingly to the acceleration of tapering and the projections released by the Federal Open Markets Committee (FOMC).

“The initial market reaction does not always hold up, but we suspect that both the Federal Reserve and investors are satisfied that the Fed is aware of and responding to inflation risks, albeit taking a measured approach dependent on incoming data. “, highlights Steve Englander, strategist at Standard Chartered.

However, the question on the minds of many is whether the next cycle of monetary tightening will end up hindering the bull market experienced by the US stock market. According to Sam Stovall, CFRA Research chief investment officer, the Fed’s intention to drive the price of money up to 0.9% next year shouldn’t be a headache for the market, at least from a historical perspective.

Since 1946, the Fed has conducted 17 rate-tightening cycles

“Previous Fed tightening cycles resulted in small price increases for the equity market during the following year, “he explains in a report distributed to his clients.

Since 1946, the Fed has conducted 17 rate-tightening cycles; 13 of them consisted of three rate hikes or more and nine of them occurred in a 12-month period. From the date of the first rate hike to the third, the S&P 500 rose an average of about 3.5% and it won in price 56% of the time, according to data compiled by Stovall.

For their part, Deutsche Bank analysts have identified 13 different rise cycles since 1955, lasting an average of less than two years. And based on their findings, which examined the average price performance of the S&P 500 on a daily basis, “there is usually solid growth in the first year of the climb cycle, with an average yield of + 7.7% after 365 days “.

That is, much of the negative effects on stocks, historically at least, may be delayed as the market could continue to trend upward for some time after the start of the tightening cycle.

As the Fed expects inflation to stay well above the median target of 2% through next year and the labor market to move steadily toward full employment, the projected path for federal funds interest rates increased on the dot plot for December relative to the one posted in September.

The median projects that participants anticipate up to three increases of 25 basis points in 2022, having been divided between not raising rates or doing it only once in their previous forecast. The FOMC anticipates a 75 basis point adjustment in 2023, followed by another 50 basis points in 2024. If this trajectory is met, the target range for federal funds would be between 2% and 2.25% by the end of 2024, just below where the FOMC estimates that the policy would become restrictive.