For this week’s featured chart, we want to highlight a theme that’s dominated the stock market this year. It has to do with the Fed, its rate-hiking cycle, and how that affects stock market returns. The chart shows that, historically, the speed at which the Fed has tightened (hiked rates) matters.

On the chart we show the S&P 500 index’s historical performance in the year leading up to a first rate hike, and then its performance for the two years afterwards. The four lines on the chart represent different market regimes.

The green line, our default regime, is the non-rate hiking cycle. This is what the market does when the Fed is neither raising nor easing interest rates consistently. The blue line represents all rate hikes cycles, so this is anytime the Fed is raising rates.

We then breakout the all rate hikes cycle regime into two different cases: a slow cycle and a fast cycle. A fast cycle (orange line) is where the Fed is raising rates at every meeting, and a slow cycle (black line) is where the Fed takes a pause between hikes.

The data show that the stock market tends to greatly underperform in the first two years of a fast rate hiking cycle compared to a slower one. The orange line, representing the fast rate cycle, is basically flat over the first two years, whereas the black line, representing the slow rate cycle, keeps rising.

This year is a case of a fast rate hiking cycle. The Fed has hiked interest rates at five straight meetings this year, which is the most active they’ve been since 2005.

Clearly, the Fed is being aggressive, and the stock market has reacted about how we would have expected in this kind of scenario. The light-blue line represents the S&P 500’s current performance. It’s tracking the fast rate hike cycle fairly closely. In fact, it’s actually underperforming the average fast rate hike cycle’s performance so far into the year, showing just how aggressive this rate hike cycle has been.

This chart provides a great frame of reference to guide our expectations for the rest of this year and next year as the Fed attempts to bring inflation under.


This is intended for informational purposes only and should not be used as the primary basis for an investment decision.  Consult an advisor for your personal situation.

Indices mentioned are unmanaged, do not incur fees, and cannot be invested into directly.

Past performance does not guarantee future results.