Playbook of the Week Excerpt: Fed Hikes

The SPY tends to struggle a month after interest rate hikes

Managing Editor
Mar 16, 2022 at 11:46 AM
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Schaeffer's Senior Market Strategist Bryan Sapp, CFA, had some particularly interesting commentary on the Federal Open Market Committee (FOMC) meeting this week. Backed by quantitative data, Sapp examined SPDR S&P 500 ETF Trust (SPY) returns following interest rate hikes. Below are his abbreviated comments:

Powell has his press conference at 2:30 p.m. ET, and I would suspect that the journalists are going to hammer him with questions about further out Fed policy. Inflation really hasn't shown any signs of abating. A lot of people are viewing the 25 basis-point hike as just a complete non-event like it's it's going to do nothing to pull down the inflation stuff.

Not to scare anyone, but I had Senior Quantitative Analyst Rocky White go back and look at the market reaction to Fed meetings going back to 2015. That was the last sort of big hiking cycle and the last time we really tried to raise rates. Before that it was all the way back to 2005 I think.

I thought this was pretty interesting and has implications for the week. So these are the one month returns after Fed meetings since 2015. There have been, 58 total meetings, and the Fed has raised rates nine of those 58 times since 2015. So if you look, the percent positive for the SPX is 55.6% one month out. So more often than not the market is higher one month out. However, if you look at the average return, it has a negative average return. What does that say? That's basically saying that when the Fed has hiked in the last seven years, the upside has been minimal, on the times that the market actually rallied, but the downside has been fairly significant.

SPX Rate Hikes

This isn't something I would derive a strategy from, because you have a pretty small sample size. But rate hikes in the recent past have been short term bearish. If you look three months out, and again, with any market data, the longer you extend the timeframe, the more bullish it's going to look just because the market has had a tendency to go up for 100 years now. But again, if you look three months out, that's been pretty bullish, it's been positive 78% of the time, three months out. Now again, it's a little different this time because we're essentially pricing in multiple hikes this year. So I don't know if this stat can hold as much water as the one month return. It goes to show that in the recent past Fed hikes had been bearish short term, but then buyers have stepped in. I'm just curious to see how that dynamic plays out this year.

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