Now that the Fed has finished its first meeting of 2022 yesterday, we all know they are planning to raise interest rates, the federal funds rate to be exact. This has caused a lot of angst among investors who are fearful that higher interest rates will wreak havoc on the stock market.
Before we look at how stocks have fared in a rising interest rate environment, let’s look at the fed funds rates over the last 68 years or so:
Fed Funds Rate from 1954 thru January 2022
As you can see, the fed funds rate is at an all time low. The Fed typically raises this rate when the economy is doing well: low unemployment, higher wages, higher consumer prices. This is all happening right now. In fact, GDP numbers just came out and showed that the economy grew 5.7% in 2021, its best showing since 1984.
Now, let’s look at how stocks have performed when interest rates start going up:
The chart above shows that stocks have risen at an average annualized rate of 9% during the 12 Fed rate hike cycles since the 1950s and delivered positive returns in 11 of those instances. The one exception was during the 1972-1974 period, which coincided with the 1973-1975 recession.
Having said all that, there is no way of knowing how this market will react to the Fed’s actions, but it’s good to know that we have history on our side.
Please let me know if you have any questions.
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
