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Don’t Expect the Fed to End This Bull Anytime Soon

What impending Fed rate hikes could mean for stocks

The Federal Reserve’s massive pivot has understandably caused stock market volatility recently. However, a look back at history is reassuring. LPL Research strategists point out that stocks tend to perform well in the year after initial Fed rate hikes, with average gains of about 10% and the S&P 500 Index higher the last eight cycles. Looking beyond that first year after those initial hikes, bull markets tend to run quite a while longer. From initial Fed rate hikes to the next bull market top, stocks have gained an average of 67% over 40 months.

Inflation is too high but may be near its peak

Inflation remains quite high, a worry for many investors. But the good news is the month-over-month changes are slowing, suggesting a peak is near. Also consider that roughly half of the excess inflation we are experiencing is COVID-19-related and is therefore unlikely to be sustained for very long. While markets may experience some volatility adjusting to higher inflation in the first half of 2022, LPL Research expects prospects for lower inflation later this year to help support markets in the second half.

Do midterm elections spell trouble for stocks?

Midterm election years tend to be more volatile for stocks due to policy uncertainty. Since 1950, midterm years have seen an average correction for the S&P 500 Index of 17%, highest of the four years of the presidential cycle. Might this year be less volatile? Possibly, if markets aren’t surprised by, or nervous about, the outcome. Stocks have historically performed better under gridlock, which appears more likely than not based on narrow Democratic majorities, but November is still a long way away. While history suggests a 10% stock market correction in 2022 is likely, LPL Research strategists would be surprised if anything much bigger than that materialized.

Tune in now

Listen to the entire podcast to get the LPL strategists’ views and insights on current market trends in the US and global economies. To listen to previous podcasts go to Market Signals podcast. You can subscribe to Market Signals on iTunesGoogle Podcasts, or Spotify and find us on the LPL Research YouTube channel.

 


IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth in the podcast may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. All indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

All index data is from FactSet.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

This Research material was prepared by LPL Financial, LLC. 

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