Fed Rate Hike Cycle History May Predict US Stock Price Decline

The US Federal Reserve has started raising interest rates for the first time since 2023 in an effort to cool off persistently high inflation. This move should increase borrowing costs, but investors are focused on how aggressively the central bank hikes and the economy's response.

According to David Lefkowitz, head of US equities at UBS Global Wealth Management, the Fed's actions have an impact on market expectations for economic growth or corporate profit growth. He believes that the Fed does not need to hike as much as investors are expecting, but this is where the debate lies.

The benchmark S&P 500 has gained more than 12% so far this year and was hovering near record levels before the rate hike announcement. However, investors are bracing for potential downside in the near term, with a 2.6% decline on average three months following the first hike in a cycle.

Lori Calvasina, head of US equity strategy at RBC Capital Markets, notes that in five out of six hiking cycles since 1994, declines from S&P 500 peak levels ranged from 8% to 14%, with lows occurring one month to three and a half months after the hike. She expects a 'garden variety pullback' of 5-10% in the S&P 500.

The current environment is different from the 2022 hiking cycle, which involved fears of a recession and aggressive rate hikes that spooked the market.