Interest Rate Hikes & Stock Performance

During the pandemic the Federal Reserve lowered interest rates to nearly zero in an attempt to spur economic activity. This endeavor was clearly very successful considering GDP for 2021 ran at about triple the rate of our historical average. This has been good news for equity investors because earnings growth and profit margins exploded to the upside.

Calendar year 2022 brings change. A byproduct of easy money and supply chain issues have resulted in the highest inflation rate increase in decades. The Federal Reserve is now embarking on a rate hiking campaign to slow inflation down and, by default, the economy.

Historically speaking, equities have gone up when rates rise. In most cases the Fed raises rates when the economy is growing too quickly, resulting in higher inflation. Since 1954 the Federal Reserve has had 13 interest rate hiking cycles. The S&P 500 moved higher during 11 of them.   

In the two instances where the market declined there were other issues that we do not currently face. The oil embargo happened during that period and economic growth was scarce. Those years were mired in stagflation which is far worse than inflation. Stagflation occurs when there is rising inflation and little to no economic growth.

The current consensus estimate for GDP growth in 2022 is 3.8%, which is more than twice the 10 year average of 1.6% as of the end of 2020. Unless these estimates change dramatically, it is reasonable to anticipate a positive movement in equity prices.