Stocks should be fine when the Fed starts raising rates next year, history shows

Published Tue, Dec 7 20213:17 PM EST

Investors may not have to worry too much about the impact of the Federal Reserve hiking rates next year, if history is any indication. Historical analyses put together by Evercore ISI's Ed Hyman and The Sevens Report's Tom Essaye show that the S & P 500 typically fares well when the Fed raises rates for the first time in a tightening cycle. For example, the Fed embarked on a rate hike cycle on June 30, 1999, when it raised rates by a quarter-point to 5%. The S & P 500 rose 7% from there to post a gain of 19.5% for the year. On June 30, 2004, the central bank raised rates to 1.25% from 1%. From there, the S & P 500 gained more than 6% to end the year up 9%. The S & P 500 also did well throughout that rate hike cycle, gaining 33.2% through September 2007 — when the Fed cut rates for the first time since 2003. Stocks did pull back after the first rate hike of the most-recent tightening cycle, which began December 2015 and ended in August 2019. However, Evercore's Hyman pointed out that there were several factors in play around that time, including a slowdown in China's economic growth and oil prices collapsing. Hyman also noted that the global economy is growing in nominal terms, while the U.S. housing market is strong, and earnings are rising at a blistering pace. All of this should propel stocks higher, even if the Fed raises rates by a quarter-point. "Fed funds at zero seems at odds with all this strength in nominal terms," Hyman wrote. Traders expect the Fed to raise rates by at least a quarter-point in May 2022, according to the CME Group's FedWatch tool. If the economy remains strong by that time, and the Fed embarks on a new tightening cycle, the market should be able to keep going higher despite the tighter monetary policy, Essaye said. "While the market will likely remain volatile near term, there's no reason yet to think that stocks can't rally through the start of another rate hike cycle," he wrote. "And given what we know about the current state of economic growth, employment and people's personal balance sheets (all of which are very strong) it is very unlikely that the Fed hiking rates 50 basis points in 2022 would be enough to end the economic expansion."

A trader works on the trading floor as a screen displays a statement by Federal Reserve Chair Jerome Powell following the U.S. Federal Reserve's announcement at the New York Stock Exchange (NYSE), September 22, 2021.

Brendan McDermid | Reuters

Investors may not have to worry too much about the impact of the Federal Reserve hiking rates next year, if history is any indication.