Investors Brace for Higher Interest Rates
Last week the Fed hiked the fed funds rate by 0.25% to a range of 0.25—0.50%.
- Fed Chief Powell strongly suggested interest rates will continue to go higher.
On Monday, Powell said in a speech that “inflation is much too high.” It is. And the Fed will take the “necessary steps” to bring inflation down (CNBC).
He added, “The inflation outlook has deteriorated significantly,” and he suggested 0.50 percentage-point rate hikes may be in the pipeline.
Possible paths
While past performance is no guarantee of future results, historically, bear markets have coincided with recessions, not rate-hike cycles.
According to LPL Research, there have been eight rate-hike cycles since 1983. The average return for the S&P 500 Index1 one year after the first rate hike was 9.2%.
- Returns ranged from -11.7% to 39.6%.
- Median return up 5.6%
- Seven of eight times, the S&P 500 was higher one year later.
Investor’s corner
No two cycles are alike. This time, rate hikes are not being implemented pre-emptively against inflation, but the Fed is reacting to higher prices.
For long-term investors, an individually crafted, well-diversified investment portfolio has historically been the soundest way to manage volatility and reach one’s financial goals.
