Fed is raising rates but stocks are rallying... What is going on?

Information is not investment advice

The era of COVID-19 cheap money is over. Who is afraid of the Fed's tightening cycle? Apparently not the stock market!  

In a move aimed to fight the worst inflation in the US in 40 years, the Federal Reserve announced on March 16 a 0.25% increase in interest rates. It's the first time in more than three years that the Fed raises the benchmark interest rate. The last increase was in December 2018. The 25 basis point hike brings the current interest rate to the range of 0.25%-0.5%. All of this was expected because markets have priced in this increase for a long time. However, the strange thing was the US stock markets' reaction after the rate hike. Markets didn't behave the way they are supposed to.

In theory, higher rates should make stocks less attractive, because higher rates mean higher borrowing costs for businesses and consumers, which lowers the overall spending. In turn, profits are affected, which is reflected in stock market prices. However, this time, investors have rebelled against this traditional wisdom, and have pounced on the stock markets. US markets jumped after the Fed announced its long-awaited rate hike and indicated the possibility of six more hikes this year. The S&P 500 closed that day 2.2% higher.

Why did US stocks rise after Fed's rate hike?  

1. The US stocks have rallied because stocks usually reflect what’s best for the economy. And, raising rates now is the best solution for the economy. Investors are finally relieved that the Fed is taking action to fight the highest level of inflation in decades.  
2. The Fed surprised the market by indicating the possibility of raising rates in all the remaining six meetings, indicating that the US economy is strong and can withstand the tightening cycle.  
3. Signs that the conflict between Russia and Ukraine is beginning to enter the stage of resolution and settlement.  
4. Signs from China that it will ease its broad regulatory crackdown.

What does history say about raising rates and US stocks? 

Over the past two years, the stock market has soared and stayed strong in the face of the worst global pandemic in a century, one of the most divisive presidential elections in US history, and the Capitol building under attack. Now stocks are facing Europe's biggest ground war since World War II, and the fastest inflation since the 1980s. History indicates that US stocks are poised to face more volatility after a rate hike. This, however, does not mean that the bull market is over. In fact, in the previous eight tightening cycles, S&P 500 was higher a year after the first increase each time, according to LPL Financial.  

Here's a look at what history has to say about the US stock market when the Fed starts raising rates:

Finally, the free money from the Federal Reserve was such a wonderful gift to the stock market during the pandemic that they became addicted to it. Therefore, although the high rates may pose a challenge to the US stock market, it may be able to overcome it by the end of the year. Traders must manage this volatility carefully to profit from it.

Similar

24.01.2023 14:07 MSFT faces gloomy forecasts ahead of earnings report

In a call scheduled for January 25, 00:30 am GMT+2, Microsoft will publish the company's earnings for the final quarter of 2022 and comment on the results, projections, and outlook for the nearest future of the company.

fundamental analysis technical analysis stocks market

24.01.2023 13:36 TESLA Earnings Report Outcome Forecast

In a call scheduled for January 25, 00:30 am GMT+2, the Tesla Inc. team will publish the company's earnings for the final quarter of 2022 and comment on the results, projections, and outlook for the nearest future of the company.

fundamental analysis market forecast technical analysis stocks market

18.01.2023 13:54 Will NETFLIX surprise investors?

The Netflix stock (NFLX), with a market cap of $145.17B and a whooping 10 000+% rise since its inception 16 years ago, experienced some turbulence for a short period last year while trading around the $250 share price. However, the NFLX stock quickly recovered and rose to over $300 towards the end of the previous quarter of 2022.

market forecast stocks market

Popular

02.02.2023 12:24 European Currencies Ahead of the Banks' Statements

On Thursday, the 2nd of February, the Bank of England will publish its report concerning interest rates and inflation data for the Eurozone. Professionals and investors anticipate that Andrew Bailey’s lead team of policy makers will likely raise interest rates to 4%; the highest in over a decade, for the tenth time in a row.

fundamental analysis market forecast technical analysis usd forex signals interest rates

31.01.2023 15:18 Will the FOMC Surprise the Markets?

The first FOMC meeting comes after a buildup of anticipation from traders and investors alike, as the markets await what posture the Fed will take regarding the interest rates; would there be a hike or a cut in interest rates? Recall that the Federal Open Market Committee had previously ended the year 2022 with a 50bps hike, and an indication from Powell, the committee chairman, that the Fed could consider raising interest rates by 75bps in the course of the year 2023.

fundamental analysis market forecast technical analysis usd forex signals interest rates

30.01.2023 13:35 What awaits the Oil Market in February?

Western countries are trying to find other options for oil and gas supplies after a 10th package of sanctions, which will put more pressure on Russian oil and decrease global oil supply. Italy, for example, is in talks with Libya. 

fundamental analysis technical analysis oil brent forex signals