By Lewis Krauskopf
NEW YORK, Sept 24 (Reuters) – History suggests US stocks are poised for weakness as the Federal Reserve starts raising interest rates, but investors trying to gauge the ultimate market fallout are focused on how aggressively the central bank hikes and the economy’s response.
In an effort to cool off persistently high inflation, the Fed last week increased its benchmark rate for the first time since 2023, which should increase borrowing costs. The US central bank signaled it expects to follow the quarter-percentage-point hike with another increase by the end of the year. Investors are factoring in more hikes in 2027.
“Our bottom line is (whether) the Fed’s actions have an impact on the market’s expectations for either economic growth or corporate profit growth,” said David Lefkowitz, head of US equities at UBS Global Wealth Management. “We don’t think the Fed has to hike that much. This is where the debate I think is going to be for the market: How much does the Fed have to hike?”
The benchmark S&P 500 has gained more than 12% so far this year, and was hovering near record levels on Wednesday. Robust corporate profits have outweighed risks including spiking oil prices amid the Middle East conflict, rising bond yields and the hawkish turn by the Fed.
But investors are bracing for potential downside in the near term. The S&P 500 has logged a 2.6% decline, on a median basis, three months following the first hike in a cycle, according to data from LPL Financial, which examined six cycles since the Fed began announcing outcomes of its meetings in 1994.
In these periods, the index endured a “meaningful drawdown” mostly not long after the initial hike, according to Lori Calvasina, head of US equity strategy at RBC Capital Markets. In five of the cycles, declines from S&P 500 peak levels ranged from 8% to 14%, with the lows occurring from one month to three and a half months after the hike, RBC said.
“The fact that we are starting this new phase keeps us vigilant for a near-term …garden variety pullback of 5-10% in the S&P 500,” Calvasina said in a note on Friday.
2022 MARKET SLIDE LINGERS
One exception, fresh in the minds of investors, is the hiking cycle that began in March 2022, when stocks eventually endured a bear market. That year, the S&P 500 dropped 25% from its peak, hitting its low about seven months after the first hike.
Calvasina and other market analysts draw distinctions between the 2022 environment and other periods, including the current one. That year involved fears of a recession and a particularly aggressive hiking cycle, analysts said.
