What Happens After The First Rate Hike?
“Don’t fight the Fed.” (Old investment saying)
One of the popular questions we’ve received lately is what do stocks do after the first rate hike? Let’s be clear, we think the Federal Reserve Bank (Fed) will leave rates low until at least 2023, but what if we get a sudden dose of inflation? This isn’t our base case, but a rate hike could potentially happen sooner in that situation.
After all, the first rate hike in 2015 set off a huge sell-off into early February 2016, as the market was quite upset and let it be known that it felt the Fed acted too soon. In fact, the first hikes of 2004 and 1999 also saw losses the first three months after the first hike, but eventually stocks were in the green a year later.
“The first hike in recent cycles has indeed brought with it some selling pressure, but hikes usually take place in strong economies, so it isn’t surprising to see returns turn green once you go further out,” explained LPL Financial Chief Market Strategist Ryan Detrick. “But let’s not sound any alarms yet, we don’t see a rate hike for a couple of years. Still, it’s good to know what the playbook could be once it happens.”
As shown in the chart below, that initial rate hike can cause some hiccups the first three months, but returns turn much better 6- and 12-months later.
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