Keep an Eye on These Sectors Post-Fed

The FOMC will announce their latest monetary policy decision at 2 p.m. ET today

Sep 17, 2015 at 10:40 AM
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Unless you live under a rock, you know the Federal Open Market Committee (FOMC) is slated to release their latest policy statement at 2 p.m. ET today, followed by a press conference from Fed Chair Janet Yellen. According to Bloomberg, the market is pricing in a 32% probability the central bank will raise interest rates -- down from 48% in the last month -- as volatility in China has stoked concern over the country's stability.

Should the Fed raise interest rates, it will be the first time the central bank has done so in nine years. Looking back over the past 40 years, Schaeffer's Senior Quantitative Analyst Rocky White found 10 occurrences where the Fed raised interest rates for the first time in at least a year -- and broke down the numbers to see how the S&P 500 Index (SPX) historically reacted in the wake of these decisions.

Based on the charts below, it looks as if the SPX experiences short-term struggles in the wake of the interest-rate hikes. Specifically, the benchmark averages a one-month loss of 1.4%, and is positive just 30% of the time. Going out one year, however, it appears the market tends to stabilize, as the SPX averages a 12-month gain of 10.8%, and is positive 80% of the time.

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Here's another perspective. It plots the price action of the S&P 500 Index along with the federal funds target rate since 1975.

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Drilling down on specific sectors, energy turned in outperformance in both the short- and long-term following the 1999 and 2004 rate hikes -- with the Energy Select Sector SPDR ETF (XLE) notching one-month gains of 1.9% and 3.1%, respectively. These widened to a respective 9.4% and 42.1% when going out one year.

On the flip side, financials saw a short-term drop following interest-rate adjustments in 1999 and 2004, with the Financial Select Sector SPDR ETF (XLF) shedding 6.1% and 2.1%, respectively, in the ensuing one-month period. Going out one year, this price action diverges, with the XLF surrendering 6.7% in 1999, and adding 3.8% in 2004.

Airlines, meanwhile, performed well following the 1997 interest-rate hike, with the NYSE Arca Airline Index (XAL) boasting a one-month return of 7.2% and a one-year gain of 78.9%. In 2004, however, this price action swung the other way, with XAL down 19.6% in the month subsequent to the Fed's action, and 14.5% the following year.

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