Investors Prepare for Market Dip After Fed Rate Hike Cycle Begins

The Federal Reserve's recent rate hike, the first since 2023, marks the beginning of a cycle that historically sees the S&P 500 decline before recovering. Data from RBC Capital Markets and LPL Financial shows that in five of the last six Fed rate hike cycles, the S&P 500 dipped between 1.6% and 15.5% three months after the first hike. However, it typically recovers within a year, with a median gain of 6.8% twelve months after the initial hike.

Despite the historical pattern, the 2022-2023 cycle was an exception, where the S&P 500 dropped 25% from its peak due to a 525-basis-point hike over 16 months. Most Fed watchers do not expect a repeat of this aggressive cycle this time around, with the current implied rate path suggesting a more modest increase of about 100 basis points.

In preparation for potential market weakness, one investor is strategically building cash and creating a watch list. Berkshire Hathaway (NYSE:BRKB)(NYSE:BRKA) and Coca-Cola (NYSE:KO) are at the top of this list. Berkshire Hathaway, with over $365 billion in cash, is well-positioned to capitalize on a market decline through share repurchases, stock purchases, and acquisitions. Coca-Cola, trading at 26 times earnings, is also a target, especially if its stock declines during a sell-off.

The investor plans to buy more Berkshire shares in anticipation of a market decline and will further boost that position if a decline occurs and its stock drops. For Coca-Cola, the investor would consider adding to their position if the dividend yield rises to around 3%, as it did during the last rate hike cycle. While there's no guarantee of a market pullback, being prepared is always wise.