Fed Rate Hike Recap: First Interest Rate Increase Since 2023

Last week on the Fastest 4 Minutes in Finance, John Shrewsbury analyzed the Fed’s latest decision to raise interest rates, which was a shift from the Fed moves over the past 3 years. September 16th was the first hike since July 26, 2023.

Entering a Rate Hiking Cycle: LPL Research Expects Four More Rate Increases

Technically, that moves us into a rate hiking cycle, meaning there will likely be more rate hikes to come. In fact, according to LPL Research, markets are expecting four additional rate increases over the next 12 months.

So, this week, with that backdrop, we are taking a look at how the market typically responds to entering a rate hike cycle, and more specifically, which market sectors tend to perform better.

How the Stock Market Performs After the First Rate Hike: S&P 500 History Since 1994

Generally, stocks tend to struggle over the first four months following the policy change, but then, tend to recover, and even advance over a 12-month period following the first hike. In fact, based on the six hiking cycles since 1994, the S&P 500 Index was positive 12 months later, 5 out of 6 times. The bear market of 2022 was the only one to buck that trend.

Best and Worst Performing Market Sectors During Rate Hike Cycles

When we zero in on sectors, there are historic winners and losers. First, the winners.

Technology Sector Leads S&P 500 Sector Returns After Rate Hikes

Here’s a chart of average S&P 500 sector returns 6 months following the first rate hike, and 12 months down the road.

The sector names are at the bottom. Tech is your leader here. The technology sector has averaged gains of 13% six months later, and 21% 12 months later. This may be a surprise to those who cling to the conventional wisdom that higher borrowing costs hurt growth companies.

Energy and Utilities Stocks: Why They Outperform When the Fed Raises Rates

Next up are Energy and Utilities. Energy has gained an average of 10% after 6 months, and 19% a year later. And, utilities are up on average 6% and 15%, respectively. LPL Research proffers this makes sense, because rate hikes tend to come toward the latter part of economic cycles when the economy is running hot, which pushes commodity prices higher and is generally supportive of the energy sector. As for utilities, the Research team chalks it up to the fact that the Fed tends to be late to move, and the market’s skepticism about the Fed engineering a soft landing, keeps investors in utilities, rather than pivoting to more attractive yields in bonds.

Underperforming Sectors: Financials and Consumer Discretionary Lag the S&P 500

On the losing side, and by losing, we are not talking negative returns, but rather underperforming the broader index, financials and consumer discretionary have lagged.

Why Bank and Financial Stocks Struggle After Interest Rate Hikes

Financials have averaged less than a percentage point after 6 months, and 9.5% after 12. This seems counterintuitive. You would think allowing banks and insurers to reinvest at higher yields and increase interest rates on cash deposits would be good for business, but the flip side is that higher loan rates can drive down loan demand. This time around, the financial sector is down 2.4% in first two weeks after the rate hike.

Consumer Discretionary Stocks and Higher Borrowing Costs

Finally, consumer discretionary makes sense, as higher interest rates can cause consumers to pull back on big ticket purchases that they may finance.

The Value of Investment Advice During a Rate Hike Cycle

All of this is for information purposes only and not an investment recommendation, but it does highlight the value of seeking investment advice, because sometimes not every stock goes up, and some do better than others.

Securities are offered through LPL Financial, Member FINRA/SIPC. GenWealth Financial Advisors is an other business name of Independent Advisor Alliance, LLC. All investment advice is offered through Independent Advisor Alliance, LLC, a registered investment adviser. Independent Advisor Alliance, LLC is a separate entity from LPL Financial.