Fed rate hike cycles have a history of denting US stock prices
SPY•Historical data show the S&P 500 has fallen a median 2.6% in the three months after a first Fed rate hike, but has typically recovered within a year. The current cycle is expected to be shorter and shallower than average, with futures suggesting just over 100 basis points of total hikes.
1. Near-term downside risk
The Fed raised its benchmark rate by a quarter percentage point last week, its first increase since 2023, and signaled another hike by year-end. LPL Financial data covering six cycles since 1994 show the S&P 500 fell a median 2.6% in the three months after the first hike. In five cycles, peak-to-trough declines ranged from 8% to 14%, with lows one to three and a half months after the hike, RBC Capital Markets said.
2. A different cycle
The 2022 cycle, when the S&P 500 fell 25% from its peak and reached its low about seven months after the first hike, stands out for its aggressive rate increases and recession fears. Futures as of Wednesday suggested the current rate will peak around 4.8% in a little over a year, for total hikes of just over 100 basis points. The average cycle since 1983 lasted just under two years and raised rates by 320 basis points; the Fed hiked 525 basis points in 2022-2023.
3. Historical recovery
A year after the first hike, the S&P 500 was up a median 6.8%, and was positive in every cycle except 2022-2023, LPL said. Analysts said stocks have tended to settle after initial jitters and return attention to economic and earnings growth. UBS's David Lefkowitz said he would watch the ISM manufacturing index, especially new orders, as the market responds to growth and inflation data.
