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Why You Shouldn't Blame S&P 500's Poor Performance Solely On Interest Rates

www.investing.com/analysis/why-you-shouldnt-blame-sp-500s-poor-performance-solely-on-interest-rates-200630241
Why You Shouldn't Blame S&P 500's Poor Performance Solely On Interest Rates
By Ismael De La Cruz/Investing.com   |  Sep 23, 2022 11:41AM ET
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  • There are far more elements to this year's bear market than just rising interest rates
  • Historically, the S&P 500 has actually risen on average in the three, six, and twelve months that followed a rate hike by the Fed
  • Seasonality also points to a difficult October

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.

Fed's Most Recent Dot Plot
Fed's Most Recent Dot Plot

Source: Fed

Fed's Historical Relationship With The Market

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:

  • Bank of America believes Wall Street has not yet seen the worst. The bank recently stated that in an environment of high inflation and with the Federal Reserve accelerating interest rate hikes, the downtrend should be prolonged, with a recession will likely pushing stocks to new lows.
  • Ray Dalio believes that if rates peak near 4.5% next year, stock prices could sink by another -20%.
  • In Europe, Germany's Bundesbank added to the negative sentiment and said signs of recession in the country are becoming increasingly evident.

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.

Seasonality Is Yet Another Problem For S&P 500

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.

Why You Shouldn't Blame S&P 500's Poor Performance Solely On Interest Rates
 

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Why You Shouldn't Blame S&P 500's Poor Performance Solely On Interest Rates

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Comments (6)
Saun Melkon
Saun Melkon Sep 25, 2022 3:52PM ET
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The stock market, like our illegal dollar and fraudulent financial system, is a crime. Watch as the bankers - whom the Fed represents - manipulate the stock market higher tomorrow. Only to steal your money later. Remember: there is no rational reason to buy stocks. All the numbers are lies.
jason white
jason white Sep 25, 2022 3:52PM ET
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Maybe Prozac is the answer?
Mo Lm
Mo Lm Sep 24, 2022 11:38PM ET
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It is not just interest rates... it is the entire corrupt system. The FED is doing what the dark poll participants are telling them. Manufactured crash.
Mo Lm
Mo Lm Sep 24, 2022 11:38PM ET
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Dark pool*
Danilo Manuel
Danilo Manuel Sep 24, 2022 11:38PM ET
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good evening here Philippineshow are u today?
Hi Hi
Hi Hi Sep 23, 2022 12:59PM ET
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when will the market start factoring in climate change, perhaps this is the start.
John Hill
John Hill Sep 23, 2022 12:59PM ET
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intelligent people will never factor in climate change. It's all a hoax. simply remember your first grade science.
Paul IllTradeThese
Paul IllTradeThese Sep 23, 2022 12:50PM ET
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the fed hiked rates in 1929 goon
Kenneth Miller
Kenneth Miller Sep 23, 2022 12:37PM ET
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It started with pipeline. Then the border. And now its becoming perfectly clear the whole Federal Government id totalling corrupt. The stock rxchange is finished. Biden has ruined the retirement plan for millions of Americans. Lookat the sanctuary cities its just the start !!!!!!!
Brad Albright
Brad Albright Sep 23, 2022 12:37PM ET
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Zzzzzzz.
Adrian White
Adrian White Sep 23, 2022 12:37PM ET
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The market (and the economy) moves in cycles. It can't go up forever and it's healthy to have corrections. The POTUS has very little to do with it, regardless of who's in office. But of course it's easy for you to just point your finger when things don't go your way.
John Hill
John Hill Sep 23, 2022 12:37PM ET
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you have 11 thumbs up and 5 thumbs down. 2 ignorant replies. there is hope for the world after all!
Brad Albright
Brad Albright Sep 23, 2022 11:52AM ET
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Ismael, please clarify: when you analyze historical patterns "after a rate hike," do you mean a single rate hike? The beginning of multiple rate hikes or the end of multiple rate hikes? Its not clear from where you are measuring.
G D
G D Sep 23, 2022 11:52AM ET
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I agree, could do with a simple edit
 
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