The stock market could be about to stumble.
Higher interest rates are generally viewed as bad for the stock market. And with the Federal Reserve announcing its third rate hike since December 2015, stocks could fall, if history is anything to go by.
“Many are familiar with the Wall Street adage ‘3 Steps and a Stumble,’ popularized by Marty Zweig, for the tendency of stocks to sell off after the 3rd Fed rate hike in the cycle,” said Nautilus Investment Research’s Tom Leveroni and Shourui Tian.
The effect of a Fed tightening cycle is different for various sectors. For banks, higher rates mean they are compensated more for lending. But for companies that make consumer discretionary goods, or things that aren’t essential, higher borrowing costs imply that shoppers’ spending habits may be reined in.
“The S&P 500 has endured significantly below average results from 1 to 12 months after 3rd rate hikes in 11 events back to 1955,” they wrote in a note on Tuesday. “Six (more than half) of those hikes occurred within a year of a major cyclical top for stocks (1955, 1965, 1968, 1973, 1980, 1999).”
The only exception was in 2004, when stocks rallied for another three years before the Great Recession.
“Hikes are generally bad for stocks, somewhat bad for the US dollar, and bullish for 10-year yields and commodities,” Leveroni and Tian said. “Will rate hikes derail stocks this time around? In a general sense, yes. Is there a deterministic formula or trigger for precisely when? Probably not.”
- Nautilus Investment Research