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Stock market when interest rates rise

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With the Federal Reserve largely expected to raise interest rates in March to combat rising inflation, stock market investors should brace themselves for a more subdued few months of gains. 

In the past, the S&P 500 has been “resilient” at the start of Fed hike cycles. 

The first is that when financing circumstances tightened, the stock market did not fall off a cliff, but investors did suffer losses. The S&P 500 has fallen 6% on average in the three months after the first rate hike in prior cycles. 

Stock market downturn, on the other hand, has shown to be short-lived. According to the Goldman analyst, the S&P 500 has returned 5% in the six months after the first rate rise of a cycle. 

Regardless matter how you look at it, the changing landscape necessitates a thorough recalibration of one’s approach to investment. This may be especially true at the start of this cycle, with Goldman Sachs forecasting ten interest rate hikes by 2025. 

The commencement of Fed hike cycles tends to coincide with a robust economy, which can aid in the recovery of cyclical sectors (materials, industrials, energy). At the factor level, value stocks outperform in the months preceding and following the first rise.

High-quality components (for example, high margins and robust balance sheets) underperform in the strong economic climate before rises and excel in the months after the initial rate increase. In the six months preceding the first rise, growth is the lowest performing element. 

So far in 2022, the S&P 500 is down 2.79 percent, while the Dow Jones Industrial Average is down 1.84 percent. The Nasdaq Composite has down 5.93 percent year to date. According to Bloomberg statistics, more than one-third of the businesses in the index are down at least 50% from their 52-week highs. High multiple tech stocks are under significant pressure, particularly financial company Block (previously Square), which is trading around a 52-week low.

We’re in the midst of an adjustment period, which may be erratic. We are transitioning from a very robust economy in which the Fed did nothing. This is undeniably changing. We’re witnessing a gradual slowing of activity – it’s still strong, but it’s moving at a slower pace. But the Fed is finally doing something about it. That’s what’s generating some turbulence here. This might be a time-consuming operation.

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