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Get ready for the climb. Here’s what the story says about the stock market return during the Fed rate hike cycles.




Bond yields will rise again so far in 2022. The US stock market seems vulnerable to a bona fide correction. But what can you really tell from just two weeks into a new year? Not much and quite a lot.

One thing feels safe: the days of making easy money are over in the pandemic. The benchmark interest rates are on the way to higher and the bond yields, which have been anchored at historically low levels, are destined to rise at the same time.

Read: The weekend reads: How to invest in the midst of higher inflation and when interest rates rise

It seemed that Federal Reserve members could not make this point clearer this past week, ahead of the traditional media coverage that precedes the central bank’s first policy meeting for the year 25-26. January.

The US consumer price and producer price index this week have only cemented the market̵[ads1]7;s expectations of a more aggressive or hawkish monetary policy from the Fed.

The only real question is how many rate hikes will the Federal Open Market Committee hand out in 2022. JPMorgan Chase & Co. JPM,
-6.15%
CEO Jamie Dimon suggested that seven could be the number to beat, with market-based estimates pointing to the potential for three increases in the federal funds rate in the coming months.

Check out: Here’s how the Federal Reserve can shrink its $ 8.77 trillion balance to fight high inflation

Meanwhile, the yield on the 10-year government bond yielded 1.771% on Friday afternoon, meaning that yields have risen by around 26 basis points over the first 10 trading days to start a calendar year, which would be the fastest increase since 1992. according to Dow Jones market data. 30 years ago, the 10-year rose by 32 basis points to around 7% to start that year.

2-year note TMUBMUSD02Y,
0.960%,
which tends to be more sensitive to the Fed’s interest rate movements, knocks on the door by 1%, up 24 basis points so far this year, FactSet data shows.

But are interest rate increases giving way to a weaker stock market?

As it turns out, during so-called interest rate increase cycles, which we seem to enter as early as March, the market tends to perform strongly, not badly.

In fact, during a Fed rate hike cycle, the average return for the Dow Jones Industrial Average is DJIA,
-0.56%
is almost 55% of the S&P 500 SPX,
+0.08%
is a gain of 62.9% and Nasdaq Composite COMP,
+0.59%
has averaged a positive return of 102.7%, according to the Dow Jones, using data dating back to 1989 (see attached table). Fed rate cuts, perhaps not surprisingly, also yield strong gains, with the Dow up 23%, the S&P 500 rising 21% and the Nasdaq rising 32% on average over a Fed rate hike cycle.

Dow Jones market data

Interest rate cuts tend to occur in periods when the economy is weak and interest rate increases when the economy is seen as too hot by one or another target, which may explain the difference in stock market developments in periods when interest rate reductions occur.

It is admittedly more difficult to see the market give better results in a period where the economy is experiencing inflation in the 1970s style. Right now, it feels unlikely that bullish investors will get a dash of double-digit returns based on how equities have developed so far in 2022. The Dow is down 1.2%, the S&P 500 is down 2.2%, while the Nasdaq Composite is down the whole 4.8% so far in January.

Read: Worried about a bubble? Why you should overweight US stocks this year, according to Goldman

What works?

So far this year, winning stock exchanges have been in the field of energy, with the S&P 500’s energy sector SP500.10,
+2.44%

XLE,
+2.35%
looks at an increase of 16.4% so far in 2022, while economy SP500.40,
-1.01%

XLF,
-1.04%
runs a distant second, up 4.4%. The other nine sectors in the S&P 500 are either flat or lower.

Meanwhile, value themes are making a more pronounced comeback, giving a weekly increase of 0.1% last week, measured by iShares S&P 500 Value ETF IVE,
-0.14%,
but month to day the return is 1.2%.

See: These 3 ETFs allow you to play the hot semiconductor sector, where Nvidia, Micron, AMD and others increase sales rapidly

What does not work?

Growth factors are being hammered as far as bond yields rise because a rapid increase in returns makes their future cash flows less valuable. Higher interest rates also prevent technology companies from being able to finance share repurchases. The popular iShares S&P 500 Growth ETF IVW,
+0.28%
is down 0.6% on the week and down 5.1% in January so far.

What’s not really working?

Biotechnology stocks are shaken, with iShares Biotechnology ETF IBB,
+0.65%
down 1.1% per week and 9% per month so far.

And a popular retail-oriented ETF, SPDR S&P Retail ETF XRT,
-2.10%
fell 4.1% last week, which contributed to a decline of 7.4% in the month so far.

And Cathie Woods flagship ARK Innovation ETF ARKK,
+0.33%
ended the week down almost 5% for a decline of 15.2% in the first two weeks of January. Other funds in the complex, including ARK Genomic Revolution ETF ARKG,
+1.04%
and ARK Fintech Innovation ETF ARKF,
-0.99%
is in the same way woe.

And popular memo names are also being hammered, with GameStop Corp. GME,
-4.76%
down 17% last week and over 21% in January, while AMC Entertainment Holdings AMC,
-0.44%
dropped almost 11% a week and more than 24% a month so far.

Gray swan?

MarketWatch’s Bill Watts writes that fears of a Russian invasion of Ukraine are on the rise, prompting analysts and traders to weigh the potential shockwaves in the financial market. Here is what his reporting says about geopolitical risk factors and their long-term impact on the markets.

Week ahead

US markets are closed in connection with the Martin Luther King Jr. holiday on Monday.

Read: Is the stock exchange open on Monday? Here are the opening hours for Martin Luther King Jr. Day

Remarkable US corporate revenue

(Dow components in bold)
TUESDAY:

Goldman Sachs Group
GS,
-2.52%,
Truist Financial Corp. TFC,
+0.96%,
Signature Bank SBNY,
+0.07%,
PNC Financial PNC,
-1.33%,
JB Hunt Transport Services JBHT,
-1.04%,
Interactive Brokers Group Inc. IBKR,
-1.22%

WEDNESDAY:

Morgan Stanley MS,
-3.58%,
Bank of America BAC,
-1.74%,
US Bancorp. USB,
+0.09%,
State Street Corp. STT,
+0.32%,
UnitedHealth Group Inc.
UNH,
+0.27%,
Procter & Gamble
PG,
+0.96%,
children morgan KMI,
+1.82%,
Fastenal Co. SOLID,
-2.55%

THURSDAY:

Netflix NFLX,
+1.25%,
United Airlines Holdings UAL,
-2.97%,
American Airlines AAL,
-4,40%,
Baker Hughes BKR,
+4.53%,
Discover Financial Services DFS,
-1.44%,
CSX Corp. CSX,
-0.82%,
Union Pacific Corp. UNP,
-0.55%,
The Travelers Cos. Inc. TRV, Intuitive Surgical Inc. ISRG, KeyCorp. KEY,
+1.16%

FRIDAY:

Schlumberger SLB,
+4.53%,
Huntington Bancshares Inc. HBAN,
+1.73%

US economic reports

Tuesday

  • The Empire State Manufacturing Index for January matures at 8:30 ET

  • NAHB housing index for January at 10.00

Wednesday

  • Building permit and starts for December at 08.30

  • The Philly Fed Index for January at 8:30 p.m.

Thursday

  • The first unemployment claims for the week ended on 15 January (and continuing claims for 8 January) at 08.30

  • Existing home sales for December at 10.00

Friday

Leading economic indicators for December at 10.00



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