Malcolm Graham
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Here’s what stocks do in the months just before a rate hike

S&P 500 tends to perform well, but it can be a pretty bumpy ride

It seems increasingly clear that the Federal Reserve’s first rate hike since 2006 is now just months away, and that is making investors nervous. But should it?

Stocks retreated Friday after a much stronger-than-expected rise in nonfarm U.S. payrolls in February.

It was a case of good news being bad news for stocks. That isn’t an uncommon phenomenon on a day-today basis, but is the prospect of the start of a tightening cycle usually bad news for equities?

“Over the past six tightening periods since 1980, the S&P 500 SPX, -1.42% has returned 23.5% on average in the nine months prior to the first rate increase,” noted Scott Minerd, global chief investment officer at Guggenheim Partners, in a note.

Fed funds futures showed that investors now see a 21% chance of rate hike in a little over three months at the Federal Open Market Committee’s June meeting, up from 16% ahead of the jobs report. A September hike is still seen as the most likely with a 63% chance.

Brian Belski, chief investment strategist at BMO Capital Markets, crunched the numbers on the market performance in the six months before and after the first rate hike in a Fed tightening cycle going back to 1980. He found that in the six months ahead of a rate rise, the S&P 500 rose 8.3% on average, while tacking on 3.7% in the six months after the first move. Overall, the S&P 500 averaged a 12.6% rise in the 12 months surrounding the first move, he said in a February note.

Moreover, history shows that, despite stocks turning in a generally favorable performance on either side of rate hike, it has been far from smooth sailing. Belski notes that the S&P 500 has suffered a significant pullback (including, for instance, the 1987 crash) at some point within each the periods preceding the initial hikes (see table below).

William Watts