Please try another search
Earlier this week, the Federal Reserve announced its third consecutive 75 basis point hike, bringing base interest rates to levels unseen since the beginning of the Global Financial Crisis (GFC) fourteen years ago.
Forecasts point to rates ending the year above 4.25%, implying a new 75bps hike in November and another 50bps in December. For 2023, the expected rate is as high as 4.6%.
And this is where the dot plot comes into play. The document containing the outlook for interest rates of the various members that make up the Fed also gives important hints of where rates might be up to 2025.
The dots in the diagram represent the committee member and their view of the future of rate hikes or rate cuts. However, to which specific member each of the dots belongs is unknown.
Source: Fed
However, if we look at the last seven times the Fed raised interest rates (1987, 1988, 1994, 1997, 1999, 2004, and 2015), we will see that, on average, the S&P 500 actually gained in the three (+0.5%), six (+7.1%), and twelve months (+10.2%) that followed the first hike of the cycle.
The three-month number seems distorted by 1997's performance when the index gained +13.6%. So, excluding the outlier, the market went on a short-term losing streak every time the Fed raised interest rates but recovered shortly after, posing solid mid-and long-term returns.
In fact, the S&P 500 only dropped twice six months after a Fed hike (1994 and now), once in the twelve months that followed (1987), and once during the entire rate-hike cycle (1999). Will now be the second time?
Likely, yes, because there are far more elements this time, such as global inflation, the risk of a worldwide economic recession, and the Russian war in Ukraine, which remains far from a resolution even after seven months of combat.
Thus, despite the historical relationship displayed above, one cannot be reasonably optimistic about equity markets today. On Wall Street, they certainly are not. Just look at the following:
Meanwhile, the S&P 500 has hit another grim milestone in 2022: It has fallen by more than -1% in 25% of the year's trading days.
Since the five-day trading week began in 1952, the only years with a higher percentage of days falling -1% or more are 1974 (26.6%), 2002 (28.6%), and 2008 (29.6%). By the way, those three years ended with the index dropping by -29.7%, -23.3%, and -38.5%, respectively.
The difficulties for the markets, far from disappearing, remain unchanged. But not only because of inflation and interest rate hikes. It is also due to the seasonal pattern.
Indeed, the second half of September is one of the most difficult periods for the stock market on a historical basis. The S&P 500 has fallen by an average of -0.75% since 1950. And that's not all; October is historically the most volatile month of the year. In fact, since World War II, October's average volatility has been +36% higher than the average for the other eleven months of the year.
Disclosure: The author does not hold any of the securities mentioned in this article.
Amid upcoming central bank meetings and crucial macroeconomic data releases, market sentiment is poised for potential shifts. While broader market indexes may continue to...
This year, the S&P 500 has seen a remarkable streak of 17 new all-time highs, outpacing many previous years. Notably, Warren Buffett's Berkshire Hathaway has stakes in two...
It had to end eventually. Whether last week’s shift in the pole position endures is something else entirely. But for the moment, US equities are no longer leading the horse race...
Are you sure you want to block %USER_NAME%?
By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.
%USER_NAME% was successfully added to your Block List
Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.
I feel that this comment is:
Thank You!
Your report has been sent to our moderators for review
Add a Comment
We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:
Enrich the conversation, don’t trash it.
Stay focused and on track. Only post material that’s relevant to the topic being discussed.
Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.
Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.