There’s one big question hovering over the Street this week: When will the Federal Reserve start hiking interest rates?
In search of that answer, all eyes are focused on the Federal Open Market Committee (FOMC) meeting on Wednesday, when the Fed could indicate it might begin hiking interest rates next year to combat inflation, which is hovering near 40-year highs.
At this point, the Street is pricing in multiple rate hikes in 2022, with the first coming in the first half of the year, though the Fed has thus far remained fairly divided on its timetable. If the Fed does indicate a quickened rate hike calendar, as some expect, what could that mean for stock investors?
Analysts at Deutsche Bank identified 13 separate hiking cycles since 1955, which lasted an average of under two years. And according to their research, which examined the average price performance of the S&P 500 on a daily basis, “there tends to be solid growth in the first year of the hiking cycle, with an average return of +7.7% after 365 days,” the analysts at Deutsche Bank wrote in a Monday report.
However, “after the initial peak on day 253 after the tightening cycle, it’s not until day 452 that this level is exceeded again, and even on day 712 it’s still trading beneath its level on day 253,” they wrote (see Deutsche Bank’s chart below).
The upshot, according to the Deutsche Bank analysts, is “on average over those 13 hiking cycles, the S&P 500 goes a period of over a year without a positive return from 9-10 months after the start of the hiking cycle” (emphasis added). Still, as the chart also shows, “the index then commences its advance 2 years after the tightening commences.”
In other words, it seems much of the negative effects on stocks, at least historically, may be delayed, and that the market could continue on an upward trend for some time after hiking starts.
Strategists like Ryan Detrick at LPL Financial suggest “we’re still in an early recovery off of the worst recession we’ve seen in most people’s lifetimes,” so the Fed still needs to be “a little cautious,” adding that three rate hikes in 2022 “is probably one too many,” he recently told Coins2Day. “What the Fed says” on Wednesday is “gonna be a big driver” for investors, he argued. Still, Detrick is among those who think the bull market can continue next year, though likely on something of a “choppier” path.
Others like Lindsey Bell, chief markets and money strategist at Ally Invest, believe that “small, gradual rate hikes rarely upset economic growth. That creates an environment in which stocks can continue to perform well,” she wrote in a recent note.
Overall, the Deutsche Bank analysts suggest that “if history is to be believed, when the Fed first hikes, likely in [the first half of] 2022, it will have an effect on the economy and financial markets over the subsequent two to three years.” Clearly, “this time could be different and this is a very unusual cycle to any we’ve seen through history,” they wrote, but that “every cycle is different and yet clear trends have emerged from our historical analysis that shouldn’t be ignored.”
Whether or not Wednesday’s FOMC meeting gives a clear signal about the pace of rate hikes in 2022, it’s only a matter of time.
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