Prepare for the climb. Here’s what the story says about stock market returns during Fed rate hike cycles.

Bond yields are rising again so far in 2022. The US stock market looks vulnerable to a bona fide correction. But what can you really say from just two weeks into a new year? Not much and enough.

One thing is certain: the days of earning easy money are over in the era of the pandemic. Benchmark interest rates are directed upwards and bond yields, anchored at historically low levels, are set to rise at the same pace.

Read: The weekend reads: How to invest in an environment of higher inflation and rising interest rates

It seemed that Federal Reserve members could not clarify this point last week, before the traditional media blackout that precedes the central bank’s first policy meeting of the year on January 25-26.

This week’s US consumer price and producer price indices releases only cemented market expectations of a more aggressive or aggressive monetary policy from the Fed.

The only real question is how many interest rate hikes the Federal Open Market Committee will distribute in 2022. JPMorgan Chase & Co. JPM,
-6.15%
CEO Jamie Dimon said seven could be the number to beat, with market-based projections pointing to the potential for three federal funds rate hikes in the coming months.

Watch: Here’s how the Federal Reserve could cut its balance sheet by $ 8.77 trillion to fight high inflation

Meanwhile, 10-year Treasury bill yields fell 1.771% on Friday afternoon, meaning yields rose by around 26 basis points in the first 10 trading days to start a calendar year, which would be the fastest increase of its kind since 1992, according to market data from the Dow Jones. 30 years ago, the 10-year jumped 32 basis points to about 7% to start that year.

The 2-year note TMUBMUSD02Y,
0.960%,
which tends to be more sensitive to Fed interest rate movements, is knocking on the door by 1%, up 24 basis points so far this year, according to FactSet data.

But do interest rate hikes translate into a weaker stock market?

Apparently, during the so-called rate hike cycles, which we seem destined to enter as early as March, the market tends to have a strong, not negative, performance.

Indeed, during a Fed rate hike cycle, the average yield of the Dow Jones Industrial Average DJIA,
-0.56%
is almost 55%, that of the S&P 500 SPX,
+ 0.08%
is a 62.9% gain and the Nasdaq Composite COMP,
+ 0.59%
reported an average positive return of 102.7%, according to Dow Jones, using data dating back to 1989 (see attached table). Fed interest rate cuts, perhaps unsurprisingly, also produce strong gains, with the Dow up 23%, the S&P 500 up 21%, and the Nasdaq up 32%, on average during a bullish cycle. of Fed rates.

Dow Jones Market Data

Interest rate cuts tend to occur during periods when the economy is weak and rate hikes when the economy is considered to be somehow too hot, which could explain the disparity in stock market performance during periods. where interest rate cuts occur.

To be sure, it’s harder to see the market outperform during a time when the economy experiences 70s-style inflation. Right now, bullish investors seem unlikely to receive a whiff of double-digit returns based on stock performance so far in 2022. The Dow is down 1.2%, the S&P 500 is down 2.2 %, while the Nasdaq Composite is down 4.8% so far in January.

Read: Worried about a bubble? Why you should be overweight US equities this year, according to Goldman

What works?

So far this year, the stock market’s winning trades have been in the energy sector, with the SP500.10 energy sector of the S&P 500,
+ 2.44%

XLE,
+ 2.35%
looking at a 16.4% increase so far in 2022, while financials SP500.40,
-1.01%

XLF,
-1.04%
cover a distant second, up by 4.4%. The other nine sectors of the S&P 500 are flat or lower.

Meanwhile, value themes are making a more pronounced return, achieving a 0.1% weekly gain last week, as measured by the iShares S&P 500 Value ETF IVE,
-0.14%,
but since the beginning of the month the yield is 1.2%.

To see: These 3 ETFs allow you to play in the semiconductor industry, where Nvidia, Micron, AMD and others are rapidly increasing sales

What is not working?

Growth drivers are taking a big impact as bond yields rise because a rapid rise in yields makes their future cash flows less valuable. Higher interest rates also hinder the ability of technology companies to finance share buybacks. The popular iShares S&P 500 Growth ETF IVW,
+ 0.28%
it’s down 0.6% over the week and 5.1% in January so far.

What really doesn’t work?

Biotech stocks are taking a bombardment, with iShares Biotechnology ETF IBB,
+ 0.65%
down 1.1% over the week and 9% over the month so far.

And a popular retail-oriented ETF, the SPDR S&P Retail ETF XRT,
-2.10%
plunged 4.1% last week, contributing to a 7.4% drop from the start of the month.

And Cathie Wood’s flagship ARK Innovation ETF ARKK,
+ 0.33%
ended the week down nearly 5% to a drop of 15.2% in the first two weeks of January. Other funds overall, including ARK Genomic Revolution ETF ARKG,
+ 1.04%
and ARK Fintech Innovation ETF ARKF,
-0.99%
they are equally saddened.

And popular meme names are being hammered too, with GameStop Corp. GME,
-4.76%
down 17% last week and down more than 21% in January, while AMC Entertainment Holdings AMC,
-0.44%
it sank nearly 11% in the week and over 24% in the month to date.

Gray swan?

MarketWatch’s Bill Watts writes that fears of a Russian invasion of Ukraine are on the rise, prompting analysts and traders to assess potential financial market shockwaves. Here’s what his report on geopolitical risk factors and their long-term impact on markets says.

Week ahead

US markets are closed in observance of the Martin Luther King Jr. holiday on Monday.

Read: Is the stock market open on Monday? Here are the Martin Luther King Jr. Day trading hours

Significant US corporate earnings

(Components below in bold)
TUESDAY:

Goldman Sachs Group
GS,
-2.52%,
Truist Financial Corp. TFC,
+ 0.96%,
Bank SBNY signature,
+ 0.07%,
PNC financial PNC,
-1.33%,
Transport services JB Hunt JBHT,
-1.04%,
Interactive Brokers Group Inc. IBKR,
-1.22%

WEDNESDAY:

Morgan Stanley MS,
-3.58%,
Bank of America BAC,
-1.74%,
US Bank USB,
+ 0.09%,
State Street Corp. STT,
+ 0.32%,
UnitedHealth Group Inc.
UNH,
+ 0.27%,
Procter and gambling
PG,
+ 0.96%,
morgan KMI children,
+ 1.82%,
Fastenal Co. FAST,
-2.55%

THURSDAY:

Netflix NFLX,
+ 1.25%,
United Airlines Holdings UAL,
-2.97%,
American Airlines AAL,
-4.40%,
Baker Hughes BKR,
+ 4.53%,
Discover DFS Financial Services,
-1.44%,
CSX Corp. CSX,
-0.82%,
Union Pacific Corp. UNP,
-0.55%,
The Travelers Cos. Inc. TRV, Intuitive Surgical Inc. ISRG, KeyCorp. KEY,
+ 1.16%

FRIDAY:

Schlumberger SLB,
+ 4.53%,
Huntington Bancshares Inc. HBAN,
+ 1.73%

US economic reports

Tuesday

  • Empire State Production Index for January due 8:30 am ET

  • NAHB Home Builders Index for January at 10am

Wednesday

  • Building permits and early December at 8.30am

  • Philly Fed Index for January at 8:30 am

Thursday

  • Initial jobless claims for the week ending January 15 (and continuing claims for January 8) at 8:30 am

  • Existing home sales for December at 10am

Friday

Main Economic Indicators for December at 10:00

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