The S&P 500 fell into a correction in early 2022 as investors positioned for the Federal Reserve to raise the fed funds rate from the 0%-0.25% range.
Andrew Harnik/AP Photo
History shows the S&P 500 can climb following multiple interest rate hikes by the Federal Reserve, LPL Financial said Wednesday as investors prepared for the US central bank to start raising rates for the first time since 2018.
The Fed on Wednesday was set to start ramping up interest rates from the ultralow range of 0%-0.25% where it was cut in 2020 as policymakers responded to the COVID-19 pandemic.
The S&P 500 has suffered this year in part as investors anticipate the Fed will issue a string of rate increases to combat inflation that's jumped to a 40-year high of 7.9% as of February. The S&P 500 was down about 9% through Tuesday's session, with all but the energy sector in the red, as Russia's invasion of Ukraine has contributed to rocking US stocks and other global equities lower.
The central bank led by Jerome Powell was widely expected to lift off with 25 basis points, or 0.25%, with markets pointing to the possibility of three to four more moves in 2022.
While borrowing costs will become more expensive, the S&P 500 equity benchmark can manage to advance under such conditions, LPL Financial said as a reminder in a note.
The "Fed rarely kicks off a new cycle of hikes with a 50 basis point hike. It is later in the cycle that tends see 50 basis point hikes or larger," said Ryan Detrick, LPL's chief market strategist, adding that stocks "tend to do just fine" during periods of multiple rate increases.
"The mid-2000s cycle is what has our attention, as there were 17 total rate hikes in 2004, 2005, and 2006, yet the S&P 500 managed to gain in every year," he said.
In that two-year cycle, the fed funds rate went up from 1% to 5.25%. The S&P's annualized return was 5.6% during the period.
"Investors need to remember that Fed rate hikes usually happen near the middle of the economic cycle, with potentially years left of gains in stocks and the economy," said Detrick. "In fact, a year after the first hike in a cycle has been fairly strong, higher a year later the past six times."
One of LPL's charts showed the S&P 500 was up 9.1% a year after the Fed in December 2015 increased rates by 0.25% under then-Chair Janet Yellen, To achieve that, the index had to overcome a loss of 1.1% in the three months after liftoff.
The chart's largest advance of 39.6% took place a year after the March 1997 rate hike of 0.25%. But the equity benchmark dropped by 11.7% in the 12 months after a quarter-percentage point increase in April 1987. The Black Monday stock crash unexpectedly took place in October 1987.
When the Fed raised rates by a hefty 0.5% in August 1983, the S&P 500 returned 2.1% a year later.
"The bottom line is rate hikes usually aren't bearish events and we don't expect this cycle to be any different," said Detrick.
LPL Financial
