The S&P 500 index fell to its worst level in a year since the Covid-19 sell-off in March 2020 and now investors have to deal with the impact of the Fed's rate hike.
Over the past two years the stock market has managed to bounce back in the face of the worst global pandemic in a century. Now the country is facing Europe's biggest land war since World War II and the fastest inflation since the 1980s.
Under these conditions, the Fed is getting ready to raise rates. Looking back, the Fed's interest rate hike had a major impact on stock market movements in the United States (US).
"History shows that these stocks are ready to experience more volatility after a rate hike. But that doesn't mean the bull market or stock gains will end," quoted from Bloomberg, Monday (14/3).
In fact, in the previous eight climbing cycles, the S&P 500 index was higher a year after its first gain according to LPL Financial.
In the last three decades, the Fed has taken four different periods of rate hikes. Nothing to the detriment of the equity market. And the tech sector has had a wild turnaround this year on the prospect of faster rate hikes.
According to Strategic Securities, technology was one of the best-performing S&P 500 sectors during the cycle, with a gain of nearly 21%. Overall, however, gains were mixed with no sector outperforming.
On the other hand, the market has the potential to strengthen from rising oil prices coupled with rising interest rates. But the Fed faces a complicated dilemma with a spike in crude oil and Russia's invasion of Ukraine driving prices higher.
The oil shocks preceded the economic downturns of the mid-1970s, early 1980s and early 1990s. But another recession, following the attacks of September 11, 2001 and the global financial crisis in 2008, was not directly caused by a sharp rise in crude oil prices.
There are other challenges investors face during the US Presidential election in November 2021. At that time, market yields tend to be muted at the start of the year due to uncertainty in the election results and the subsequent effect on government policy changes.
But stocks usually post strong rallies late in the year. Overall, mid-semester performance tends to decline, an average of more than 17%. The first quarter and the following two quarters were historically the weakest in the president's four-year term.
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