Get ready for the climb. Here’s what history says about stock-market returns during Fed rate-hike cycles.

Bond yields are rising again so far in 2022. The US stock market looks vulnerable to a bona fide correction. But what can you really say about just two weeks into a new year? Not much and enough.

One thing feels certain: the days of making easy money are over in the age of the pandemic. Benchmark interest rates are headed higher and bond yields, which have been anchored at historically low levels, are set to rise in tandem.

Read: Weekend Reading: How to Invest Amid Higher Inflation and as Interest Rates Rise

It seemed Fed officials couldn’t make that point any clearer last week, ahead of the traditional media blackout that precedes the central bank’s first policy meeting of the year on January 25-26.

The US consumer and producer price indices released this week have only cemented market expectations of more hawkish or hawkish monetary policy by the Federal Reserve.

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

Check: Here’s how the Fed can shrink its $8.77 trillion balance sheet to combat high inflation

Meanwhile, 10-year Treasury note yields returned 1.771% on Friday afternoon, meaning yields are up some 26 basis points in the first 10 trading days to start a calendar year, which it would be the fastest rise since 1992, according to Dow Jones market data. Thirty years ago, the 10-year bond was up 32 basis points to around 7% to start that year.

The 2-year note BX:TMUBMUSD02Y,
which tends to be more sensitive to Fed interest rate moves, is knocking on the 1% door, up 24 basis points year-to-date, FactSet data shows.

But do interest rate increases translate into a weaker stock market?

It turns out that during so-called rate hike cycles, which we look like we’ll be entering in March, the market tends to perform strongly, not poorly.

In fact, during a Fed rate hike cycle, the average return of the Dow Jones Industrial Average DJIA
is almost 55%, that of the S&P 500 SPX
is a 62.9% gain and the Nasdaq Composite COMP
has averaged a positive return of 102.7%, according to Dow Jones, using data going back to 1989 (see attached table). The Fed’s interest rate cuts, perhaps unsurprisingly, also produce strong gains, with the Dow Jones up 23%, the S&P 500 up 21% and the Nasdaq up 32%, on average over a cycle of Fed rate hikes.

Dow Jones Market Data

Interest rate cuts tend to occur during periods when the economy is weak and rate increases when the economy is considered too good by some measure, which may explain the disparity in stock market performance during periods. periods in which interest rate reductions occur.

It is certainly more difficult to see the market outperforming during a period when the economy is experiencing 1970s-style inflation. double digits based on how stocks are shaping up so far in 2022. The Dow is down 1.2%, the S&P 500 is down 2.2%, while the Nasdaq Composite is down one 4.8% so far in January.

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

What is working?

So far this year, the winning trades in the stock market have been in energy, with the energy sector XX:SP500 of the S&P 500

looking at a 16.4% advance so far in 2022, while XX finances: SP500

they are taking a distant second place, with an increase of 4.4%. The other nine S&P 500 sectors are flat or lower.

Meanwhile, value themes are making a stronger comeback, posting a weekly gain of 0.1% last week, as measured by the iShares S&P 500 Value ETF IVE.,
but month to date the return is 1.2%.

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

What doesn’t work?

Growth factors are taking a hit so far as bond yields rise because a rapid rise in yields makes their future cash flows less valuable. Higher interest rates also hamper tech companies’ ability to finance share buybacks. The popular iShares S&P 500 Growth ETF IVW
it is down 0.6% for the week and 5.1% for January so far.

What is really not working?

Biotech stocks are crashing, with the iShares IBB Biotech ETF
so far, 1.1% in the week and 9% in the month.

And a popular retail-oriented ETF, the SPDR S&P Retail ETF XRT
it fell 4.1% last week, contributing to a 7.4% drop in the month to date.

And Cathie Wood’s flagship ARK Innovation ETF ARKK
it ended the week down almost 5% for a drop of 15.2% in the first two weeks of January. Other funds in the complex, including ARK Genomic Revolution ETF ARKG
and ARK Fintech Innovation ETF ARKF
they are equally afflicted.

And popular meme names are also coming under fire, with GameStop Corp. GME
was down 17% last week and down more than 21% in January, while AMC Entertainment Holdings AMC
it sank almost 11% in the week and more than 24% in the month to date.

gray swan?

MarketWatch’s Bill Watts writes that fears of a Russian invasion of Ukraine are mounting, leading analysts and traders to weigh potential financial market shockwaves. Here’s what their report says about geopolitical risk factors and their long-term impact on markets.

week ahead

US markets are closed for the Martin Luther King Jr. holiday on Monday.

Read: Is the stock market open on Monday? These are the business hours for Martin Luther King Jr. Day.

Notable US Corporate Earnings

(Dow components in bold)

Goldman Sachs Group
Truist Financial Corp. TFC,
Signature Bank SBNY,
PNC Financial PNC,
JB Hunt JBHT Transportation Services,
Interactive Brokers Group Inc.IBKR


MS Morgan Stanley,
Bank of America BAC,
US Bank Corp. USB,
State Street Corp. STT,
United Health Group Inc.
Procter & Gamble
Kinder Morgan KMI,
Fastenal Co. FAST


Netflix NFLX,
United Airlines Holdings UAL,
American Airlines AALs,
baker hughes bkr,
Discover DFS Financial Services,
CSX Corp. CSX,
Union Pacific Corp. UNP,
Travelers Cos. inc. TRV, Intuitive Surgical Inc. ISRG, KeyCorp. WRENCH


Schlumberger VMS,
Huntington Bancshares Inc. HBAN

united states economic reports


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

  • NAHB Home Builders Index for January at 10 a.m.


  • Building permits and starts for December at 8:30 am

  • Philly Fed Index for January at 8:30 am


  • Initial jobless claims for the week ending January 15 (and continuing claims for January 8) at 8:30 am

  • December Owned Home Sale at 10 am


Advance economic indicators for December at 10 am


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