How did the stock market perform in past interest rate hike cycles?

With interest rates likely coming in March, what should investors expect? Here’s how the market performed in the past four rate hike cycles…

• Dec. 2015: The S&P 500 fell nearly 10% over the following two months — making new highs eight months after the rate increase.
• Jun. 2004: The S&P 500 fell nearly 7% over the next 45 days — making new highs four months later.
• Jun. 1999: The S&P 500 traded sideways — making new highs 5 months later, until eventually collapsing from the dot-com bubble.
• Feb. 1994: The S&P 500 fell over 8% in the following two months and traded sideways — eventually making new highs a year later.

Here are the takeaways…

• Markets often fell right after the initial hike — finding a bottom within the following months.
• The markets went on another bull run for 3-4 more years — with the exception of 1999.
• The Fed started rate increases by 0.25% each time.

So interest rates aren’t necessarily bad for the stock markets and in many cases — the Fed is increasing interest rates on the back of a strong economy (low unemployment and high growth). But this time, market conditions are very different…

• Inflation is much higher than ever before.
• The market is pricing in a potential 0.50% initial increase.

The cyclically adjusted price-to-earnings (CAPE) ratio — an indicator that shows how expensive the stock market is — hasn’t been this high since 2000. When interest rates rose in 1999, the market went into a bear market within a year.

Looking forward: The market could likely go even lower from now — so expect higher volatility in the coming months. Are we going up after? No one can tell but until inflation starts to ease, a multi-year bull market will be a tough sell.