As investors brace for the Federal Reserve to raise interest rates this week for the first time since 2018, a look back at market history shows certain stocks typically outperform during significant changes in central bank policy. The Fed has kept the benchmark rate near zero in response to the Covid pandemic but is now gearing up to raise its target fed funds rate for the first time since 2018. Investors expect the Fed to raise rates by a quarter percentage point and to announce the hike at the end of its two-day policy meeting Wednesday. The move to tighten monetary policy comes as inflation heats up at a pace not seen in decades. The consumer price index for February rose 7.9% from a year ago, the highest level since January 1982. CNBC Pro identified the last three times the Fed raised rates for the first time after a signficant period of no hikes. These initial rate hikes occurred on June 30, 2004; Dec. 16, 2015; and Dec. 14, 2016. The previous rate cycles bear some resemblance to the current situation. In 2004, the Fed was looking to reverse easing put in place following the Sept. 11, 2001, terror attacks and the "jobless recovery" that followed. The Fed's benchmark borrowing rate ultimately would rise from 1% to 5.25% in that cycle. The latter hikes were aimed at normalizing the easy-money policies put in place after the 2008 financial crisis. The 2015 rate hike was supposed to pave the way for four more increases in 2016, a year that ultimately saw only one as the economy unexpectedly slowed. Once the Fed got going, the funds rate would go from a target range of 0%-0.25% to 2.25%-2.5% before the central bank had to start cutting again. CNBC Pro looked at the average performance of Dow Jones Industrial Average components one month after these initial hikes. Take a look at the top five Dow performers, according to FactSet data. Based on the historical performance, it appears investors reach for defensive names with dividends that also benefit from a strong economy. The Fed typically hikes rates due to a robust economy. Verizon had the best overall performance in the month following a fresh rate hike, returning 1.9% on average. Amgen and Honeywell were next in line, with an average 1.2% and 0.7% performance, respectively. McDonald's and Walmart rounded out the top five list. Next, CNBC Pro found the worst five Dow performers. Technology stocks appeared to take the hardest hit after the rate hikes. Intel had the worst overall performance in the aftermath of significant Fed hikes with an average loss of 9.2%. Cisco and Salesforce lost on average 8.7% and 7.9%, respectively. Walt Disney and Coca-Cola were the fourth- and fifth-worst performing Dow members. Finally, CNBC Pro took a closer look at financial stocks. Financial names are typically thought of as benefiting from rising rate environments. Higher interest rates benefit banks in several ways. For instance, banks can charge borrowers more for loans, boosting profitability. However, the finance Dow components on average fell in the period after the rate hikes. Goldman Sachs lost 5.6%, while JPMorgan shed 4.8% on average. The rate hikes likely got priced into the financial names ahead of the actual hike, resulting in a "sell the news" effect. — CNBC's Jeff Cox contributed to this report.
The Federal Reserve building is seen before the Federal Reserve board is expected to signal plans to raise interest rates in March as it focuses on fighting inflation in Washington, January 26, 2022.
Joshua Roberts | Reuters
As investors brace for the Federal Reserve to raise interest rates this week for the first time since 2018, a look back at market history shows certain stocks typically outperform during significant changes in central bank policy.