Fed Rate Hikes: Stocks Tend to Bounce Back

The Federal Reserve is widely expected to raise interest rates for the first time since July 2023, which may lead to short-term market losses. However, historical data suggests that stocks tend to recover quickly from these declines.

According to analysis by strategists at The Kobeissi Letter, the S&P 500 has averaged a decline of 4% over the six weeks following the first Fed rate hike in a cycle since 1988. But this loss is typically short-lived, as stocks recover all of those losses within five to six weeks on average.

In fact, the S&P 500 has returned an average of 4% in the six months following the first interest rate hike and a staggering +9% over the next 12 months. This pattern has held true in every cycle except for 2022, when markets were impacted by the pandemic.

The Fed's decision to raise rates is driven by sticky inflation readings and rising energy costs, which have forced central bankers back into tightening mode. Investors are also focused on updated economic projections and the 'dot plot' to gauge future moves on interest rates.