Get ready for the climb. Here’s what history says about stock-market returns during Fed rate-hike cycles.

Bond yields are rising again so far in 2022. The US stock market seems vulnerable to a goodwill correction. But what can you really say from just a fortnight into a new year? Not much, much.

One thing is for sure: Gone are the days of making easy money in the era of a pandemic. Benchmark interest rates are trending higher, and bond yields, which have been held at historically low levels, are expected to rise in tandem.

ReadWeekend read: How to invest in high inflation and high interest rates

It looked as if Fed members couldn’t make this point more clearly over the past week, ahead of the traditional media blackout that precedes the central bank’s first policy meeting of the year on January 25-26.

US CPI and Producer Price releases this week have boosted market expectations of more aggressive or tighter monetary policy from the Federal Reserve.

The only real question is how many rate increases the FOMC will introduce in 2022. JPMorgan Chase & Co. JPM
CEO Jamie Dimon has hinted that seven may be the number to beat, with market-based forecasts suggesting three increases in the federal funds rate are likely in the coming months.

paying off: Here’s how the Federal Reserve trimmed its $8.77 trillion balance sheet to combat high inflation

Meanwhile, 10-year Treasury yields were at 1.771% on Friday afternoon, meaning yields rose by about 26 basis points in the first 10 trading days to start a calendar year, which would be the fastest such rise since 1992, according to data Dow Jones Market. 30 years ago, the 10-year was up 32 basis points to about 7% for the start of that year.

BX two-year note: TMUBMUSD02YAnd
FactSet data, which tends to be more sensitive to Fed rate moves, is on the door at 1%, up 24 basis points so far this year.

But do higher interest rates translate into a weaker stock market?

As it turns out, during the so-called rate-raising cycles, which we seem ready to get into as early as March, the market tends to perform strongly, not badly.

In fact, during the Fed rate hike cycle the average yield of the Dow Jones Industrial Average
Nearly 55% of the S&P 500 SPX Index
is a 62.9% gain and the Nasdaq Composite
It achieved an average positive return of 102.7%, according to Dow Jones, using data going back to 1989 (see attached table). It may not be surprising that the Fed’s rate cuts lead to solid gains, with the Dow up 23%, the S&P 500 up 21% and the Nasdaq up 32% on average during the Fed’s rate-raising cycle.

Dow Jones market data

Interest rate cuts tend to occur during periods when the economy is weak and interest rates rise when the economy is perceived to be too hot by some measures, which may explain the variance in stock market performance during periods when interest rate cuts occur.

It is certainly difficult to see that the market is outperforming during a period of 1970s-style inflation. For now, bullish investors aren’t likely to get a whiff of double-digit returns based on the way stocks are shaping up so far in 2022. The Dow is down 1.2%, the S&P 500 is down 2.2%, while the Dow is down 1.2%, while the S&P 500 is down 2.2%. The Nasdaq Composite is down 4.8% so far in January.

Read: Worried about a bubble? Why you should overweight US stocks this year, according to Goldman

What is working?

So far this year, the energy stock market winning trades have been, with the S&P 500 Energy Sector XX:SP500

XLE
Given a 16.4% advance so far in 2022, while financial data XX: SP500

XLF
It runs per second by 4.4%. The other nine sectors of the S&P 500 are either flat or down.

Meanwhile, value themes are seeing a more visible comeback, posting a 0.1% weekly gain last week, as measured by the iShares S&P 500 Value ETF IVE.And
But the monthly return so far is 1.2%.

We see: These three ETFs let you play in the hot semiconductor sector, where sales of Nvidia, Micron, AMD and others are growing rapidly.

What is not working?

Growth factors so far are affected by rising bond yields because the rapid rise in yields makes future cash flows less valuable. High interest rates also hamper tech companies’ ability to fund share buybacks. The popular iShares S&P 500 Growth IVW Fund
It’s down 0.6% on the week and down 5.1% in January so far.

What really doesn’t work?

Biotech stocks under attack, with iShares Biotechnology ETF IBB
Down 1.1% on the week and 9% on the month so far.

and a popular retail-oriented ETF, SPDR S&P Retail ETF XRT
It fell 4.1% last week, contributing to a 7.4% drop in the month to date.

The pioneering ARK Innovation ETF ARKK in Cathy Wood
It ended the week down about 5%, posting a 15.2% drop in the first two weeks of January. Other funds in the pool, including the ARK Genomic Revolution ETF ARKG
The ARK Fintech Innovation ETF ARKF
She woebegone similarly.

Popular meme names are also coming up, by GameStop Corp. GME
It fell 17% last week and less than 21% in January, while AMC Entertainment Holdings AMC
It sank nearly 11% in the week and over 24% in the month so far.

Gray swan?

MarketWatch’s Bill Watts writes that fears of a Russian invasion of Ukraine are growing, prompting analysts and traders to assess potential shock waves in financial markets. Here’s what his reports say about geopolitical risk factors and their long-term impact on the markets.

next week

US markets are closed for the Martin Luther King Jr. holiday on Monday.

Read: Is the stock market open on monday? Here are the Martin Luther King Jr. day trading hours

Profits of prominent American companies

(dow components in bold)
Tuesday:

Goldman Sachs Group
pAnd
Trust Financial Corp. TFCAnd
SBNY Signature BankAnd
PNC Financial PNCAnd
JB Hunt Transportation Services JBHTAnd
Interactive Brokers Group Inc. IBKR

Wednesday:

Morgan Stanley MSAnd
Bank of America BackAnd
USB BancorpAnd
State Street Corp. STAnd
UnitedHealth Group Inc.
United nationsAnd
Procter & Gamble Company
PGAnd
Kinder Morgan KMIAnd
Fastenal Fast Company

Thursday:

Netflix NFLXAnd
United Airlines Holdings UALAnd
American Airlines AALAnd
Baker Hughes BKRAnd
Discover DFS Financial ServicesAnd
CSX Corp. CSXAnd
Union Pacific Company UNPAnd
The Travelers Cos. Inc. TRV, Intuitive Surgical Inc. ISRG, KeyCorp. key

Friday:

Schlumberger SLBAnd
Huntington Banks Corporation HBAN

US economic reports

Tuesday

  • Empire State Manufacturing Index for January at 8:30 a.m. ET

  • NAHB Home Builders Index for January at 10 a.m.

Wednesday

  • Building permits start in December at 8:30 a.m.

  • Philadelphia Fed Index for January at 8:30 a.m.

Thursday

  • Initial Jobless Claims for the Week Ending January 15 (and Continuing Claims January 8) at 8:30 a.m.

  • December Existing Home Sales at 10am

Friday

Leading economic indicators for the month of December at 10 am

.

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