It has been seen that in the previous eight hiking cycles the S&P 500 was higher a year after the first increase every single time.
For Wall Street, it is ‘business as usual’ as the Federal Reserve takes the first step to fight rising inflation in the country. US inflation is pacing ahead at a multi-decade high level and the central bank has already stepped in to tame inflation before it flare-up further. For the first time since 2008, the Federal Reserve raised interest rates by a quarter percentage point and signaled more hikes in all six remaining meetings in 2022.
US stocks closed near session highs with S&P 500 posting gains of 2.24% and Nasdaq Composite clocking 3.77 % after gaining more than 487 points before the trading ended. “Equities likely found inspiration from Powell admitting “it may take longer than we like” to bring inflation down which was perhaps interpreted as a slower, longer hiking cycle to support a “sustained economic expansion,” says Madhavi Arora, Lead Economist, Emkay Global Financial Services.
Fed Chairman Jerome Powell’s remarks about the U.S. Economy’s strength and that it can handle monetary tightening seems to have gone well with the investors.
“Markets have already priced in this eventuality that the US FED will hike its FED funds rates in almost all meetings in 2022 and the start of 2023. What is seen as a positive is that despite this normalisation, the FED expects real GDP growth to remain above 2.5% and more importantly, expects the unemployment rate to remain at the current level of 3.5%. So no hard landing at all. That, if true, is extremely encouraging for the stock markets and hence maybe explains the short-term positive reaction to the FED lift-off,” says Arvind Chari, CIO, Quantum Advisors.
Some of the top gainers on Nasdaq were:
Atlassian Corp. PLC Cl A
Datadog Inc. Cl A
ASML Holding N.V.
Micron Technology Inc.
Excerpts from the Federal Reserve FOMC statement
Indicators of economic activity and employment have continued to strengthen. Job gains have been strong in recent months, and the unemployment rate has declined substantially. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.
The Committee expects inflation to return to its 2 percent objective and the labor market to remain strong. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 0.25 to 0.5 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee expects to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities at a coming meeting.
Fed Rate Hike and Stock Market
Rising interest rates may not necessarily mean a negative impact on the stock market. As per studies done in the past, U.S. stocks could experience more volatility once the rates are increased. However, it has been seen that in the previous eight hiking cycles the S&P 500 was higher a year after the first increase every single time.
Markets may still continue to show volatility in the weeks ahead. “The market will get served with curveballs as usual. We are still not done with COVID, we do not know the outcome of the Russia-Ukraine skirmish and hence we cannot predict the outcome of commodity prices and hence inflation,” adds Chari.
While the Fed will continue to tackle inflation besides managing economic growth, investors may keep looking at opportunities in the growth stocks that are available at reasonable valuations.