What Happens to Stocks When the Fed Hikes: A Historical Guide

  • S&P 500 usually has higher returns 12 months after first hike

  • Stocks poised for more swings as Fed grapples with oil’s surge

The New York Stock Exchange. Photographer: John Taggart/Bloomberg

By Jess Menton

The S&P 500 Index is off to its worst start to a year since the Covid-fueled selloff in March 2020, and now investors have to contend with rising interest rates possibly starting at Wednesday’s Federal Reserve meeting.

Over the past two years the stock market has managed to rise in the face of the worst global pandemic in a century, one of the most divisive presidential election in U.S. history and the Capitol being attacked by Americans upset over the results of that election. Now it’s facing the largest ground war in Europe since World War II, and the fastest inflation since the 1980s.

So with the Fed preparing to hike rates, it’s worth wondering if the S&P 500, which is still up almost 90% since bottoming on March 23, 2020, is running out of steam.

Here’s a look at what history says about the U.S. stock market when the Fed starts raising rates:

History of Rate Hikes

History suggests U.S. stocks are poised to experience more volatility following the rise in rates. But that doesn’t mean the bull run is over. In fact, in the previous eight hiking cycles the S&P 500 was higher a year after the first increase every single time, according to LPL Financial.

What Happens After the First Fed Rate Hike?

S&P 500 Index Future Returns

Source: LPL Research, Bloomberg

Fed Effect

How the S&P 500 sectors perform in Fed rate-hike cycles

Source: Strategas Securities

Aggregate of '94, '99, '04, '15; Real Estate is only '04, '15

In the past three decades, the Fed has taken on four distinct rate hike cycles. None have been detrimental equity markets. And technology, which has seen wild swings this year on the prospect of faster rate increases, is typically among the best performing S&P 500 sectors during those cycles, with a gain of nearly 21%, according to Strategas Securities. But overall, leadership varies with no sector outperforming in all four instances, the data show.

Source: Bloomberg