about 2 years ago • 1 min
The Federal Reserve (the Fed) concluded its first policy meeting of the year on Wednesday, and the US central bank signaled it's prepared to raise interest rates at its next meeting in March and continue hiking as needed to head off the fastest inflation in four decades.
Following the meeting, markets now expect five quarter-point rate increases from the Fed this year. And the benchmark S&P 500 has declined nearly 9% in 2022 as investors adjust to the new reality.
But rising interest rates aren’t always bad for stocks. The relationship between central bank policy and markets is complicated and depends on the reasons why policymakers feel the need to tighten the supply of money into the economy. Are they acting because the economy is heating up and unemployment is low or because inflation is getting out of hand?
The chart above shows the complex historical relationship between the S&P 500’s returns and Fed policy. Sometimes when the Fed hikes rates, stocks rise with them (the red lines above the x axis). And sometimes stocks fall following hikes (the red lines below the x axis). The same is true for cuts to Fed rates.
Below the surface of stock markets, however, some clearer patterns emerge. As Carl wrote in today’s Insight, rising interest rates tend to help cheaper value stocks outperform more expensive growth stocks. And sectors like financials and energy tend to do better than utilities or telecoms.
Full disclosure: I found this great chart in a Bloomberg article and they didn’t cite a source, so I have no idea who produced it. But from the look of it I assume it’s some investment bank.
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.