The Federal Reserve is carefully raising interest rates, but history shows that the pace of these hikes can significantly impact stock market performance. A study by Charles Schwab analyzed over a dozen rate-hiking cycles since World War II, categorizing them as either 'slow' or 'fast.' Slow hiking cycles, where rates are raised roughly every other meeting, saw the S&P 500 drop about 12% on average in the subsequent 12 months. In contrast, fast hiking cycles, with rate increases at nearly every meeting, resulted in an average decline of more than 16% for the S&P 500.
Currently, the Fed has been moving at a measured pace, with a quarter-point rate hike in September and no change in October. The fed funds futures market predicts a 100% chance of another quarter-percentage point hike next month. The market is expecting the fed funds rate to reach the 4.50%-4.75% range by the June 2027 meeting, which would place the current cycle in the 'slow' category.
The pace of rate hikes matters because sudden changes create uncertainty, which the market dislikes. Rapid increases, like those seen in 2022, leave investors guessing about the economic outlook and often lead to defensive strategies. However, one potential game-changer could be an end to the Iran war, which is driving up energy prices and contributing to inflation. If the conflict were to resolve, it could alter the Fed's plans and impact market expectations.
Despite the historical trends, the current S&P 500 is up about 1% since the September meeting but down about 3% from its high. While the road ahead may be rough for U.S. stocks, staying the course might be the best option given the uncertainty.