The Fed will probably hike interest rates next Wednesday. This is far from being the last rate hike in this rate hike cycle.
We’ve already shown that rising interest rates aren’t consistently bearish for the stock market. We can look at this idea from another angle.
If rising interest rates are bearish for the stock market, then the stock market should fall after the last rate hike in a rate hike cycle (i.e. the economy and stock market should tank after the Fed has increased interest rates by “too much”).
This isn’t the case historically.
The stock market tends to go up 1-6 months after the Federal Reserve stops hiking interest rates. Here are the S&P 500’s forward returns after the last rate hike in each rate hike cycle.
Click here to download the historical data.
Look at all the GREEN.
- June 29, 2006
- May 16, 2000
- February 1, 1995
- February 26, 1989
- August 9, 1984
- January 1981
- March 1980
Let’s look at the S&P 500 during each of these historical cases in detail.
June 29, 2006
May 16, 2000
February 1, 1995
February 26, 1989
The Federal Reserve stopped hiking interest rates after February 1989. The S&P rallied nonstop after the Fed stopped hiking rates. The next “significant correction” began 1.5 years later in July 1990.
August 9, 1984
The Federal Reserve stopped hiking interest rates after January 1981. This was the start of a “significant correction” that our Medium-Long Term Model predicted.
This historical case has a major difference vs today. Interest rates were sky high – at double digits.
The stock market tends to go up when the Federal Reserve is hiking interest rates and rates are increasing. This is because the Fed hikes rates when the economy is growing, which is bullish for the stock market.
The stock market tends to go up for a few months after the Fed stops hiking interest rates. The Federal Reserve is data-dependent, which means that they stop hiking interest rates when the economy starts to show some signs of major problems. The stock market lags the real-time economy, which is why the stock market goes up a little after the Fed stops hiking interest rates.
The Fed is hiking interest rates right now, and this isn’t consistently bearish for the stock market. Focus on the economic data and not the Fed’s actions.