The Biggest Risk To Stocks Is Not The Fed

The most significant risk to stocks is not the Fed.

Over the next few months, you will see a lot of articles suggesting that initial rate hikes from the Fed don’t impact stocks. Such as this one:

“Historical analyses put together by Evercore ISI’s Ed Hyman and The Sevens Report’s Tom Essaye show that the S&P 500 typically fares well when the Fed raises rates for the first time in a tightening cycle.

For example, the Fed embarked on a rate hike cycle on June 30, 1999, when it raised rates by a quarter-point to 5%. The S&P 500 rose 7% from there to post a gain of 19.5% for the year.”Fred Imbert, CNBC

That is a true statement. When the Fed initially starts hiking rates, it is usually during a strongly trending bull market. Much like a car rolling downhill in neutral, tapping the brakes initially doesn’t do much to curb the momentum. However, keep pushing on the brake pedal long enough, and the car will slow to stop. There are two things to take away from the chart below.

Risk To Stocks, The Biggest Risk To Stocks Is Not The Fed

The risk is not the initial rate hike, the second, or even the third for stocks. It is the point where the increase in rates causes something to break either in the economy, credit markets, or a change in bullish psychology. Secondly, without exception, rate-hiking campaigns led to a negative outcome. Furthermore, the negative impact occurred at consistently lower levels.