Study: the Fed's rate hikes are medium term bullish for the stock market


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.

  1. June 29, 2006
  2. May 16, 2000
  3. February 1, 1995
  4. February 26, 1989
  5. August 9, 1984
  6. January 1981
  7. March 1980

Let’s look at the S&P 500 during each of these historical cases in detail.

June 29, 2006

The Federal Reserve stopped hiking interest rates after June 2006. The S&P rallied over the next 1 year. The next bear market began 16 months later in October 2007.

May 16, 2000

The Federal Reserve stopped hiking interest rates after May 2000. The S&P swung higher over the next 3 months before starting its bear market downleg in September 2000.

February 1, 1995

The Federal Reserve stopped hiking interest rates after February 1995. The S&P soared nonstop throughout the rest of 1995. The next “significant correction” began 3.5 years later in 1998.

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 August 1984. The S&P rallied over the next year. Its next “significant correction” began 3 years later in 1987.

January 1981

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.

March 1980

The Federal Reserve stopped hiking interest rates after March 1980. The S&P rallied over the next 8 months before beginning a “significant correction”.

Conclusion

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.

1 comment add yours

  1. Hi Troy,
    Nice study! As you said, the Fed’s rate hikes are not bearish for the short term. Many says the real trouble starts with the first rate cut. Even though it is early now, you can also study on what happens to the stock market after the Fed’s first rate cut.
    Best,
    Attlee

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