Prepare for the climb. Here is what historical past says about stock-market returns throughout Fed rate-hike cycles.


So far, bond yields are rising again in 2022. The US stock market seems vulnerable to a real correction. But what can you really say about just two weeks into a new year? Not much and quite a lot.

One thing seems certain: the times of easy money-making are over in the pandemic era. Benchmark interest rates are rising and bond yields, which have been anchored at historically low levels, will rise in tandem.

Read: Weekend titles: How to invest in higher inflation and rising interest rates

It seemed Federal Reserve members couldn’t make that point any clearer over the past week, ahead of the traditional media blackout that precedes the Fed’s first policy meeting of the year on Jan. 25-26.

This week’s US CPI and PPI releases have only cemented market expectations of a more aggressive or tightening monetary policy from the Fed.

The only real question is how many rate hikes the Federal Open Market Committee will hand out in 2022. JPMorgan Chase & Co. JPM
CEO Jamie Dimon has hinted that seven could be the number to beat, with market-based forecasts pointing to the potential for three Federal Funds Rate hikes in the coming months.

Cashbox: For example, the Federal Reserve could shrink its $8.77 trillion balance sheet to combat high inflation

Meanwhile, yields on the 10-year Treasury note were yielding at 1.771% as of Friday afternoon, meaning yields are up about 26 basis points in the first 10 trading days at the start of a calendar year, which would be the strongest such rise since 1992 on the Dow Jones market data. 30 years ago, the 10-year bond rose 32 basis points to around 7% to start this year.

The 2 year note BX:TMUBMUSD02Y,
which tends to be more sensitive to Fed rate moves is knocking on the door of 1%, up 24 basis points this year, FactSet data shows.

But will rate hikes lead to a weaker stock market?

As it turns out, during so-called rate hike cycles, which we seem to be entering as early as March, the market tends to perform strongly, not poorly.

In fact, during a Fed rate hike period, the average return for the Dow Jones Industrial Average is DJIA
is nearly 55% that of the S&P 500 SPX
is up 62.9% and the Nasdaq Composite COMP
has achieved an average positive return of 102.7%, according to Dow Jones using data going back to 1989 (see attached table). Fed rate cuts are also, perhaps unsurprisingly, delivering strong gains, with the Dow up 23%, the S&P 500 up 21% and the Nasdaq up 32% on average during a period of Fed rate cuts.

Dow Jones market data

Rate cuts typically occur during periods of weak economy and rate hikes when the economy is perceived as somewhat too hot, which may account for the different stock market performance during periods of rate cuts.

Of course, it’s harder to see the market outperforming at a time when the economy is experiencing 1970s-style inflation. For now, it seems unlikely that optimistic investors will get any hint of double-digit returns based on the stock’s performance so far in 2022. The Dow is down 1.2%, the S&P 500 is down 2.2%, while the Nasdaq is down Composite is down a whopping 4.8% in January.

Read: Worried about a blister? Why Goldman says you should be overweight US stocks this year

What works?

So far this year, there have been successful stock trades in the energy sector with the S&P 500 energy sector XX:SP500

looking up 16.4% so far in 2022, while the financials XX:SP500

are in second place with an increase of 4.4%. The other nine sectors of the S&P 500 are either flat or lower.

Meanwhile, value themes are making a stronger comeback, posting a 0.1% weekly gain last week as measured by the iShares S&P 500 Value ETF IVE,
but month to date the yield is 1.2%.

See: These 3 ETFs allow you to play in the hot semiconductor sector, where Nvidia, Micron, AMD and others are generating fast-growing sales

What does not work?

Growth factors are being hammered to the point that bond yields are rising because a rapid rise in yields makes their future cash flows less valuable. Higher interest rates are also hampering tech companies’ ability to fund share buybacks. The popular iShares S&P 500 Growth ETF IVW
down 0.6% on the week and down 5.1% in January.

What is really not working?

Biotech stocks are shelled with the iShares Biotechnology ETF IBB
1.1% down on the week and 9% month to date.

And a popular retail-focused ETF, the SPDR S&P Retail ETF XRT
plunged 4.1% last week, contributing to a 7.4% drop month-to-date.

And Cathie Wood’s flagship ARK Innovation ETF ARKK
ended the week down nearly 5%, posting a 15.2% drop in the first two weeks of January. Other funds in the complex including ARK Genomic Revolution ETF ARKG
and ARK Fintech Innovation ETF ARKF
are just as sad.

And popular meme names are also shared with GameStop Corp. GME hammered
down 17% last week and over 21% in January, while AMC Entertainment Holdings AMC
Down almost 11% on the week and more than 24% month to date.

gray swan?

MarketWatch’s Bill Watts writes that fears of a Russian invasion of Ukraine are mounting, prompting analysts and traders to weigh the possible shock waves in financial markets. Here’s what his coverage of geopolitical risk factors and their longer-term impact on markets says.

week ahead

US markets are closed due to Martin Luther King Jr.’s holiday on Monday.

Read: Is the stock exchange open on Monday? Here are the trading hours on Martin Luther King Jr. Day

Notable US corporate earnings

(Dow components in bold)

Goldman Sachs Group
Truist Financial Corp. TFC,
Signature bank SBNY,
PNC Finance PNC,
JB Hunt Transport Services JBHT,
Interactive Brokers Group Inc. IBKR


Morgan Stanley MS,
Bank of America BAC,
US Bancorp USB,
State Street Corp. STT,
United Health Group Inc.
Procter & Gamble
Kinder Morgan KMI,
Fastenal Co. FAST


Netflix NFLX,
United Airlines Holdings UAL,
American Airlines AAL,
Baker Hughes BKR,
Discover Financial Services DFS,
CSX Corp. CSX,
Union Pacific Corp. UNP,
The Travelers Cos. inc TRV, Intuitive Surgical Inc. ISRG, KeyCorp. KEY


Schlumberger SLB,
Huntington Bancshares Inc. HBAN

US economic reports


  • Empire State Manufacturing Index for January, due 8:30 am ET

  • NAHB Home Builders Index for January at 10am


  • Building permits and starts for December at 8:30am

  • Philadelphia Fed Index for January at 8:30 am


  • Initial jobless claims for the week ending January 15 (and rolling claims for January 8) at 8:30 am

  • Existing Home Sales for December at 10am


Leading economic indicators for December at 10am

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