As 2022 begins, investors can’t help but wonder how much gas is left in the tank for stocks. The S&P 500 has more than doubled since March 2020.
The Fed tops the Wall Street worry list. Today we’ll cut through the noise to show you why the bears are likely wrong, again. Don’t fear the Fed.
With inflation raging, how fast will the Fed raise interest rates to contain it? The bears worry the central bank has waited too long to tame prices, making a major slowdown inevitable as they’re forced to slam the brakes.
Add in omicron and you’ve got a real witches’ brew of uncertainty. It’s a double whammy – it could slow growth and boost inflation, simultaneously. Corporate profits are in jeopardy, so stocks need to fall. That’s the bear case.
And investors are paying attention. Gains have slowed with long-shunned, safer sectors like utilities, staples and health care suddenly springing back to life. Fear abounds. Seems logical, right? After all, everyone knows you “don’t fight the Fed”, especially not during a global pandemic!
Hold on. Before we run for the hills let’s take a deep breath and look at the facts. History shows that Fed rate hikes aren’t a death sentence for stocks. The pace of the hikes is what matters. And with omicron looking relatively benign despite being highly contagious, the supply chain snarls and labor shortages that have spiked inflation are likely peaking. So, the Fed should be able to raise rates gradually.
Let me show you what I mean. Those 4 simple words are ringing loud and clear again: Don’t fear the Fed.
Don’t Fear the Fed
So, get this. When the Fed raises rates slowly stocks do fine. Since 1946, in the six economic cycles when the Fed waited at least one Fed meeting in between each rate hike, the S&P 500 averaged a 10.5% gain in the year after the first move (see chart).
Performance then cooled, averaging only 1.6% in the second year, but that’s still a 12.1% return over two years – below average – but hardly worth bailing over.
Have a look. Don’t fear the Fed.
But also notice that when the Fed has tightened quickly, stocks haven’t fared as well, but they’ve held steady. We’ve seen seven cycles where the Fed raised rates in quick succession, hiking at almost every meeting.
Stocks averaged a 2.7% decline in the 12 months following the first hike. But the S&P 500 got that back the following year, averaging a 4.3% gain in year two. So, even when the Fed tightened aggressively, stocks still edged out gains in the two years after they started raising interest rates.
Don’t fear the Fed!
Here’s the bottom line: Fans of MAPsignals know we recommend going against the crowd when fear is extreme. As I’ve said before, no guts no glory.
Just because others are freaking out doesn’t mean you have to. The smarter move is to take a deep breath and look at the facts. Knowing that rate hikes aren’t a market killer is one piece of the investing puzzle.
The other piece is knowing how to pick great market-beating stocks. Consider a subscription to MAPsignals today and become a more informed investor. Combining history’s lessons and awesome market data, you can be proactive when others are worried.
After all, the bears have predicted 5 of the last 2 recessions!
Happy New Year!
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Alec Young is an investment strategist, working on Wall Street since 2005. He currently serves as CIO at Tactical Alpha LLC.
Prior to TA, Alec spent 15 years in senior investment strategist roles at major financial firms. Most recently, he served as FTSE Russell’s Managing Director of Global Markets Research. Prior to that, he was VP & Investment Strategist at Oppenheimer Funds and served as Global Equity Strategist at S&P Global.
See his full bio here.