A new Fed tightening cycle may have just begun. If that’s the case, buckle up
The Federal Reserve last week raised its overnight rate for the first time in three years. That could mean bad news for stocks near term.
TL;DR
- The Federal Reserve increased its overnight rate for the first time in three years.
- Historically, the S&P 500 has fallen 3.2% on a median basis in the month after the Fed starts a tightening cycle.
- After three months of an initial rate increase, the S&P 500 is down 2.3% and has been positive only 17% of the time.
- Deutsche Bank strategist Henry Allen believes investors may be underestimating the risks of tighter monetary policy and the scale of future tightening.
- Reasons for underestimation include inflation data not fully reflecting energy prices and the possibility of the Fed overcorrecting to combat inflation.
- Bespoke data shows the S&P 500 eventually recovers, with a median gain of 6.4% six months and 6% one year after a rate hiking cycle begins.