Rate hikes have not been so scary for markets in 2022. In fact, Wall Street appears to be cheering an aggressive Federal Reserve, at least in the short term. After each of the central bank’s three rate hikes this year, stocks have finished the day solidly higher. That is a departure from the previous decades, when the market’s reaction to hikes was more tepid. “Historically, the average performance of the S & P 500 on days that the Fed has raised rates has been weaker than if policymakers decided on other actions. However, the current tightening cycle has seen much more positive reactions by equities to rate hikes,” Bespoke Investment Group said in a note to clients on Wednesday. Prior to this Fed cycle, rate hikes since 1994 were greeted with an average increase of 19.1 basis points by the S & P 500, according to Bespoke. A basis point is equal to 0.01%. The market moves this cycle, however, have pushed that average gain to 33.6 basis points. Part of the reason for the abnormal reactions in 2022 could be the decades-high inflation rate. While rate hikes can slow growth and make future cash flows look less attractive, inflation is the top worry for many investors. “The biggest risk to the US economy is not the Fed raising rates. It is inflation which is hurting consumer and business confidence and pricing consumers out of a new home, a car, gas and meals on the table,” billionaire hedge fund manager Bill Ackman said in a series of tweets Tuesday . If the Fed can bring inflation under control quickly, the reasoning goes, the U.S. economy and stock market can get back on a more normal growth path and avoid a long period of so-called “stagflation.” Some traders have now even started to bet on rate cuts next year, suggesting that some on Wall Street expect the Fed to quickly focus on supporting the economy once inflation starts to retreat. To be sure, the positive reaction to the Fed’s hikes has not been long lasting. After both the May and June hikes, the gains for the S & P 500 were erased in the following session. The Fed has also been signaling its rate hike plans ahead of time, so investors may have been pricing in those moves in between meetings. And that may be contributing to the S & P 500 sliding more than 16% year to date. The Fed is expected to hike rates by another by 75 basis points on Wednesday afternoon. (75 basis points equals 0.75%)
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