History speaks: How long will it take for U.S. stocks to recover lost ground after interest rate hikes and wars?

In order to defeat the inflation behemoth, the US Federal Reserve (Fed) announced on March 16 that it would raise interest rates by one yard (0.25 percentage points), suggesting that it will raise interest rates 6 times this year! The Fed has finally opened its trump card, but investors are worried: Will raising interest rates be detrimental to the performance of U.S. stocks?

According to Fortune, in theory, higher interest rates should make stocks less attractive, as that means raising borrowing costs for companies and consumers and lowering overall spending.

However, it is clear that the market has long abandoned this old thinking. Even as prices skyrocketed and geopolitical anxiety continued to spread, investors flocked to U.S. stocks. The news that the Federal Reserve raised interest rates for the first time in 2018 and oil prices pulled back from their highs drove the three major U.S. stock indexes to their biggest gains in more than a year.

Raising interest rates is not a bad thing for U.S. stocks
“The stock market will reflect what’s best for the economy, so if a rate hike is best for the economy, then the stock market will respond,” said Andrew Hiesinger, chief executive of Quant Data, a U.S. market investment firm. In fact, “Forbes” pointed out that if historical data is used as a guide, it can be found that the Fed raising interest rates is not a bad thing.

According to data from Dow Jones Market Data from 1989 to January this year, U.S. stocks performed better during the rate hike cycle – the Dow Jones Industrial Average rose nearly 55%, and the S&P 500 index was 62.9% , the Nasdaq index is as high as 102.7%; U.S. stocks also rose during the rate cut stage, but the rise was not as strong as the rate hike. The average increase of the first three indexes was only 23%, 21%, and 32%, respectively.

Market agency Truist Advisory Services further dismantled 12 interest rate hike cycles in U.S. history and found that the S&P 500 had an average annual return of 9.4%, and only one of them had a negative annual return, that is, between 1972 and 1974, The United States was facing a disastrously stagnant inflation crisis at the time.

Forbes also pointed out that rate hikes will weigh on the market in the short term, with mixed performance. Market research firm Evercore ISI analyzed that in the first month after the start of the rate hike cycle, although the S&P 500 fell by an average of 4%, it eventually recovered its lost ground, rising by an average of 3% after half a year, and up to 5% a year later.

The fundamentals of US companies are good, and the impact of war is limited
Keith Lerner, co-chief investment officer of Truist Advisory Services, explained that the reason why U.S. stocks generally rise during the Fed rate hike is that it is usually accompanied by a healthy economic environment and rising profits.

Although the war between Russia and Ukraine continues, inflation continues to deteriorate, and the complex environment makes the market panic, but the “Wall Street Journal” reported that the fundamentals of American companies are strong, which has swept away the anxiety of many investors, even in the face of soaring costs and geopolitical conditions. Political uncertainty, but still profitable. A strong job market will also continue to support U.S. economic growth.

In addition, history shows that war has little impact on U.S. stocks. In the long run, it is corporate revenue and profits that drive stock prices, and geopolitical conflict is not enough to change stock valuations. Ryan Detrick, chief market strategist at LPL Financial, an American brokerage, analyzed the Pearl Harbor incident and a total of 22 major geopolitical conflicts that followed, and found that the S&P 500 fell by an average of 4.8%, taking 19.7 days to correct and another 43.2 days to recover lost ground. Shows that the stock market always has a way to quickly get out of the war.

Therefore, JPMorgan global market strategist Gabriela Santos believes that thanks to strong economic momentum and corporate balance sheets, the United States will not repeat stagnant inflation! But while predicting a rebound in U.S. stocks, investors still need to pay careful attention to three major market risks: the war in Russia and Ukraine affecting commodities, China’s blockade disrupting supply chains, and the ups and downs caused by the Federal Reserve’s interest rate hike.