Interest rates

The Fed is expected to raise interest rates in 2022. Here’s what that means for US stocks.

Stock markets will face a bumpier ride in 2022, analysts say.
  • The Federal Reserve is expected to start raising interest rates next year as it tries to tackle skyrocketing inflation.
  • History shows that, on average, the S&P 500 rose in the 12 months after the first rate hike in a cycle.
  • Still, a number of uncertainties, such as new coronavirus variants, are currently clouding the stock outlook.

U.S. stocks had a record year in 2021.

The Federal Reserve kept interest rates low and injected more than $ 1 trillion into the economy, and growth rebounded from the 2020 crisis. The benchmark S&P 500 stock index duly climbed further. by 20%.

Corn dizzying inflation brought the Fed to strongly reduce its bond purchases and anticipates a number of interest rate hikes next year.

Markets wait the central bank to start raising in May, given that it has signaled it will likely hike rates three times in 2022.

Rate hikes aren’t bad for stocks

So is the end of the easy money bad news for stocks? History says no.

In the past 30 years, the Fed has embarked on a cycle of rate hikes four times, according to FactSet figures shared with Insider. The data company defines a cycle as a series of four rate increases, performed at intervals not exceeding six months.

On average, the S&P 500 fell 1.8% in the three months after the first rise. But then it gained 4.6% more after six months and 7.7% more after 12 months.

“The rate hike alone is not bad for stocks,” Bank of America strategist Savita Subramanian said in a note.

Yet history may not always be the best guide. After all, stocks rose 6% the year after the Fed started to hike rates in 1999, only for the S&P 500 to dip dramatically in 2000 when the dot-com bubble burst.

The outlook is unusually uncertain, and analysts are divided on what could happen over the next year.

BMO’s Brian Belski estimates the S&P 500 – which closed at 4,568 on Monday – will rise to 5,300 by the end of 2022, as the recovery continues and Fed policy remains favorable, by historical standards .

But Morgan Stanley believes it will be much lower, at 4,400.

Tech stocks could struggle

Analysts say the uncertainty – such as around inflation, variants of the coronavirus, the pace of rate hikes, the US midterm elections – means investors need to think more about stocks that may prosper.

The prospect of higher rates has hit tech stocks, especially unprofitable ones, in recent weeks. The future earning potential of technologies is generally exciting, but looks less attractive when there are higher returns to be had elsewhere.

Read more: UBS Wealth Management’s $ 3.2 Trillion CIO Shares 10 New Year’s Investing Resolutions To Get Your Portfolio Healthy in 2022

US inflation is expected to remain elevated for much of 2022. This could hurt many tech stocks further, pushing investors to other companies with solid dividends or which can pass the costs on to clients, the companies said. analysts.

” Our heart [picks] are sectors that should benefit from further economic expansion until 2022, stabilizing activity in China, and have profit / price power to defend their valuations against potentially higher rate volatility, ”said Emmanuel Cau, equity strategist at Barclays, in a note.

Barclays loves the look of the energy, industrial and healthcare sectors.

Prepare for more volatility

Investors are bracing for a tougher time in 2022, compared to the relative calm of 2021, as growth rates cool and inflation remains high.

Steen Jakobsen, chief investment officer at Saxo Bank, told Insider he believes there is a 25% chance the Fed will let inflation get out of hand and need to raise rates faster than investors expect. what is called a policy error. “Then we get a massive sale in the market,” he said.

Wall Street analysts on average expect the S&P 500 to end 2022 at 4,843, according to a November Bloomberg poll.

But they agree that this is unlikely to be a smooth ride. “Volatility is likely to increase rapidly over the next 12 months,” BofA’s Subramanian said.