Stock performance during rate hike cycles

1: Interest rates tend to rise when the economy is doing well. Initially, rising rates don’t slow the economy but over time the pressure builds, forcing businesses to cut back capital investment reducing economic growth. It is often near this point that stocks enter a bear market.

This entire process can take months to years to take place with stocks performing reasonably well until the end of the rate hike cycle.

The chart shows the relationship between S&P 500 Index performance and the federal fund rate. It shows that there have been six rate-hike cycles over the past 40 years, and the S&P 500 Index has been positive in all six of those cycles. Returns are total returns of the S&P 500 Index during rate hike periods.

Sources: Wells Fargo Investment Institute and Bloomberg, March 16, 2022. Past performance is no guarantee of future results. An index is unmanaged and not available for direct investment. This chart was excerpted from the Investment Strategy report dated March 21, 2022.

2: Since the Ukraine invasion, Russian sea exports of oil has declined by almost 1.5 million barrels per day. Amid the backdrop of growing global demand – particularly as the post-Covid travel normalizes – the energy market remains tight, putting a floor under oil prices.

Of course, this could change if the Fed tips the economy into recession. However, a lack of capital investment, depleting reserves and disrupted Russian supply could keep energy prices elevated for years.

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3: House prices in the US have risen dramatically since the pandemic, driven by cheap debt and a lack of supply (second chart). However, the recent spike in mortgage rates (third chart) could put a dent in demand, thus softening the market.

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