Since 1983, S&P has fallen on ‘lift-off ’ day just 50% of the time

- Adam Shell @adamshell USA TODAY

The words “Fed rate hike” strike fear into stock investors. They fear the party is over once the Federal Reserve starts boosting borrowing costs. But history shows the first rate hike — which the Fed is contemplat­ing now and could come as early as Thursday — doesn’t necessaril­y have to be a bull market killer.

Sure, the start of a Fed ratehike cycle — especially considerin­g the last rate hike occurred June 29, 2006 — could cause more volatility (code words for violent market swings) and scares along the way.

But history shows that stocks don’t go down in a straight line after the Fed moves. Stock performanc­e is mixed. In fact, the stock market has posted gains in all sorts of time periods following the Fed’s so-called “lift-off ” day.

In the past six rate-hike cycles dating to 1983, the Standard & Poor’s 500 stock index declined on the day of the Fed’s first rate increase three times, or 50% of the time.

The biggest Day 1 loss was in February 1994, when the benchmark stock index cratered 2.3%, according to data from Birinyi Associates. In contrast, stocks jumped 2.3% after the first rate hike in January 1987 and 1.6% following the initial increase in June 1999.

The cause for alarm this time? The fact the Fed hasn’t hiked rates in nearly a decade and has kept short-term rates near 0% for so long that investors have become addicted to so-called cheap money.

But with the coming shift from an ultra-easy Fed to a less-accomodati­ng Fed, the transition from a period of declining and record low interest rates to a rising-rate environmen­t coupled with investors’ recent wariness following the stock market’s first 10% correction since 2011 and signs of a significan­t slowdown in China, wariness is high on Wall Street.

“A rate hike, with a stroke, ends this era,” is the way Michael Hartnett, a global investment strategist for Bank of America Merrill Lynch describes the coming change in Fed policy.

Some fear taking the economy off of so-called life support will cause market turmoil. Others say that scenario goes too far.

“The latest bugaboo is one that

has often been associated with correction­s or the onset of bear markets: the start of a Fed rate hike cycle and rising bond yields,” Bob Doll, chief equity strategist at Nuveen Asset Management, said in a recent report titled, Rising Rates Shouldn’t End This Bull

Market. “Many investors,” Doll wrote, “believe that when rates rise, the party is over for stock prices. Historical­ly, however, this has not been the case.”

Historical data from the past six rate-tightening cycles back up his claim. While two of the six cycles saw stocks lower a year after the initial rate hike, the average gain for the S&P 500 in all six periods was 2.6%.

And two years after hike No. 1 the market was 14.4% higher, Doll’s data show. Still, he points out there were bumps along the way. The stock market, on average, suffers a peak-to-trough decline of roughly 10% in post, rate-hike trading.

If stocks do take a hit when the Fed hikes, it likely will be a shortlived drop and “prove to be an excellent buying opportunit­y,” Brian Belski, chief investment strategist at BMO Capital Markets, argued in a report that stressed rate hikes “should be welcomed, not loathed.”

His data show that corporate profits, U.S. economic growth and S&P 500 performanc­e in the past five rate-hike cycles have performed better than normal when the Fed is tightening, as those periods typically occur when the economy is doing well.

The takeaway: Interest rates have a lot of room to run higher before becoming a major drag on economic growth.

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