Here’s What Stocks Do Before And After The Fed Starts Hiking Rates

SAM RO

SEP. 26, 2014

Sooner or later, the Federal Reserve will begin normalizing monetary policy, which means higher interest rates are coming.

This has investors rightfully worried because higher rates mean higher interest costs, which should be bad for profits and ultimately stocks.

Deutsche Bank Chief US Equity Strategist David Bianco examined the history of Fed rate hikes and their impacts on stocks.

“Stocks typically sell-off on the first of a series of rate hikes, but the magnitude and duration of the sell-off depend on conditions,” Bianco writes. “During early cycle hikes the initial sell-off was generally small, quickly recovered and further S&P gains came in next three months and longer (like 2004, 1983, 1972). But many sell- offs on late cycle hikes became corrections or even bear markets.”

Unfortunately, it’s only in hindsight do we know where we are in the cycle.

“Determining whether it’s early or late in the cycle is subjective, but the shape of the curve, inflation measures, years since the last recession can help,” Bianco said. “Next year is likely another mid-cycle year and we don’t expect a severe S&P reaction to hikes, but the risk is the Fed hikes too late or too little and inflation accelerates requiring the Fed to hike to levels higher than expected.”

Bianco’s 27-page research note is riddled with exhibits.

But we thought this one was pretty elegant.

It’s the average price move of the S&P 500 during the four months before and the six months after the first rate hike. It’s the average of the last seven hikes.

It’s not the most helpful chart for people who enjoy obsessing over the details. It does, however, show that the general direction of the stock market tends to be up.

Deutsche Bank

Stocks Drop, Then Rally After The Fed Announcement

SAM RO

SEP. 18, 2014

REUTERS/Lucas Jackson

Traders listen to an announcement by the U.S. Federal Reserve on the floor of the New York Stock Exchange in New York December 18, 2013.

The Fed’s FOMC statement is out, and markets are moving.

Immediately, following the announcement, the dollar jumped and stocks dropped from breakeven levels. The Dow was down by around 40 points.

And then they bounced back.

Currently, the Dow is up by 40 points (0.2%) and the S&P 500 is up 5 points or (0.2%).

Fed watchers note that the so-called “dot plot” looks more hawkish than it did in June.

The “dot plot” is the diagram the illustrates the distribution of FOMC members’ forecasts for the Fed’s benchmark interest rate.

In other words, the dots suggest higher rates sooner than later.

Here’s Brean Capital’s Peter Tchir with the roundup:

Dots – 1.27% average for end of next year (up from 1.2% in June). More hawkish. Also hard to get to 1.25% starting in June. I had nice templates set up, but Fed went in 1/8′s this time instead of 1/4′s.

2016 2.68% up from 2.53% – much higher.

2017 is “new” and is 3.54%.

Markets weren’t doing much ahead of the announcement.

The Dow was up 20 points and the S&P was up 2 points.

Here’s a look at the current dot plot.

Federal Reserve