History Says Federal Reserve-Induced Stock Rout Won’t Last

Do investors need to worry that the recent slide in the stock market will continue?

Maybe not, if you believe that stock prices are falling because investors see imminent increases in the cost of borrowing money.

Historically, when the Federal Reserve starts to raise interest rates, which it normally does in small increments, then the stock market rallies mostly, new research shows.

“It is a bit more complicated than simply the Fed is going to tighten so sell stocks,” states a recent report from currency dealer Bannockburn Global Forex. “Data presented by MarketWatch’s Mark DeCambre shows that more often than not, the S&P 500 rallies over the course of most Fed tightening cycles.”

In fact, four of the last five rate hiking cycles coincided with a minimum of double-digit percentage gains over the period of increases in the cost of borrowing money. In only one interest rate hiking period, 1999-2001, did the S&P 500 fall.

If that was all there was to it then the well-signaled increases in the Fed Funds target interest rate shouldn’t bother investors too much.

However, there are other concerns investors should look at. Number one on the list of worries should be a potential war on the edge of the European Union. You can read more about that risk here and here. A Russian invasion of Ukraine would likely send stocks down further, while Treasuries, energy and wheat prices would almost certainly rally.

Absent a major military conflict, data on U.S. employment and inflation will dominate the markets. These two items together are likely to heavily influence the forthcoming mid-term elections. rising inflation is essentially a stealth tax on workers’ paychecks. Unless something changes fast, the negative feelings around the decades-high inflation rates will continue to vastly outweigh the benefits of falling unemployment. Historically, Americans vote with their pocket books so expect the incumbent Democrats to take a beating come November.

On top of that there are a slew of major central bank meetings pending, meaning there’s a lot of anticipation (and uncertainty) over what policy makers will announce in coming days. And as most investors know, uncertainty is the same as risky and tends to lead to market volatility.

The Bannockburn report sums it as follows: “With the volatility of equity markets and the risk of conflict in Europe, risk is sucking up oxygen.” In other words, investors will remain on edge until the uncertainty dissipates and the volatility drops.