Wondering how the stock market does when interest rates go up? Let’s dive in! Back in March 2022, the Federal Reserve raised rates for the first time in a while. Fast forward through 11 more rate hikes and we’re at a 5.25% – 5.5% Fed Funds rate, aimed to tackle high inflation rates from back in 2022. Even though the rate hikes are done, borrowing costs might stay up longer because of strong consumer activity. But keep an eye on the 10-year bond yield at around 4.2% – it’s got the yield curve looking inverted, hinting at a potential upcoming recession within the next year.
Inflation’s sticking around more than we hoped, but there are simple tricks to combat rising prices and cut down on costs. If the Fed keeps up with gradual rate hikes, it won’t hit borrowers too hard. People with variable rates can switch to a fixed rate if they do it in time. Sadly, the aggressive Fed moves have boosted consumer borrowing and mortgage rates by a lot. Now, let’s chat about how the stock market has behaved historically during these rate-hiking times, plus how different sectors hold up when rates are on the rise.
In previous rate hike cycles, the stock market usually bounces back over the next year. But 2022 was a bit of a downer with the S&P 500 dropping by about 19.6%. It did get worse at some point. But hey, in 2023, the S&P 500 bounced back strong, with a sweet 24% return. So far, 2024’s looking bright, thanks in part to the rise of artificial intelligence which is revolutionizing productivity for those who embrace it.
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According to the wisdom of the charts by LPL Research and Bloomberg, the S&P 500 boasts a positive track record 50%, 75%, and even 100% of the time three, six, and twelve months after the initial rate hike. The 2023 market performance has proven this pattern right.
Based on this historical performance data, it’s wise to hang on to your investments and keep averaging those dollars in for as long as you can. Remind yourself to stay put for at least a year. Rather than selling off during a downturn or bear market, consider buying more – unless you recognize your risk levels are getting too high. Your best gauge on that is experiencing a down market and seeing how you react.
It’s easy to get a bit carried away during a good market run, so be careful. Let’s see how stocks behave under different U.S. presidents too. Unfortunately, the Fed went full speed on rate hikes in 2022 and 2023, the quickest and most aggressive move in a while. Let’s also zoom into how S&P 500 sectors usually fare when rates are on the upswing.
A nifty chart from Strategas Securities breaks down the average yearly returns by S&P 500 sector during rate-hike cycles. The winners tend to be Technology, Real Estate, Energy, Health Care, and Utilities. These sectors often outshine the S&P 500 as interest rates climb.
Tech stocks are an interesting case, as they’re generally the brightest stars during these cycles. Tech’s performance doesn’t always follow the traditional pattern as they lean more on future earnings predictions rather than current numbers. Plus, tech firms usually carry lighter debt loads compared to non-tech companies – think Apple, Google, and Microsoft. These tech giants enjoy hefty cash reserves and could even earn more from interest income as rates rise. Another angle is that tech products usually don’t require financing, making them less sensitive to interest rate shifts. If folks are buying Apple Air Pods or subscribing to cloud software, they can usually pay up front or settle with a credit card easily.
Now with tech stocks being on sale lately, getting some shares in leaders like Google, Amazon, Nvidia, or Apple may be a smart move. I’ve had these in my portfolio for quite some time. And if you’re keen on a bit more risk, dipping into names like DocuSign and Affirm could be worth a shot – but do your own research. Like anything, all investments come with risks.
Real estate loves the rate hikes too. Rising rents typically benefit the real estate scene more than higher mortgage rates hurt it. Real estate tends to ride the inflation wave since it’s a key part of that cycle. With the Fed nudging rates up in strong economic conditions, real estate often thrives because robust job markets, solid earnings, and wage growth overpower the rising costs of borrowing. Landlords might want to stick around when inflation is perky.
Interestingly, mortgage rates don’t always shoot up in sync with Fed rate hikes. The 10-year Treasury bond yield plays a big role, keeping mortgage rates from climbing too much. Looking back at certain periods, when the Fed was raising rates, mortgage rates didn’t spike as dramatically. The housing market’s future looks rosy with many foreseeing home prices picking up through 2024, bringing good news for real estate investors. Institutions are even revising their home price predictions to the upside.
Watching the patterns in interest rate movements, variable-rate mortgages could be the smarter pick over fixed ones in the long run. You can always refinance before any rate changes hit you. And remember, the Fed rate impacts mortgages indirectly through the Treasury bond yield.
Stocks take a hit after the Fed starts rolling back rates once the yield curve flips. When it comes to mortgages, expect the rates to circle back down as inflation cools off. Analysts are even looking at a jump in home prices over the next few years. Predictions have been made, and they’re pretty optimistic, projecting a growth spurt up to July 2024. This kind of outlook paints a positive picture for the market.
Looking ahead, bets are on that mortgage rates will stay relatively steady or even slide post the Fed’s tightening cycle. History seems to side with mortgage stability or slight rises, not dramatic hikes. I personally feel the real estate cycle is leveling out as we head into 2024 and beyond.
Real estate crowdfunding has been a big part of my investment strategy, aiming to diversify my heavy holdings in SF real estate to rake in more passive income. I’ll keep pouring dollars into private real estate for the foreseeable future, given its stability and long-term rewards. Diversification is always key in money matters, and adjusting your strategy from time to time can keep things fresh.
The financial world’s pace is picking up, with wild swings like oil prices shooting up and plummeting in a flash or the Fed going aggressive on rate hikes, then suddenly halting due to a curveball like a new COVID variant. But through all the twists and turns, one thing’s for sure – the U.S. economy and its people are remarkably resilient. So, the smart play is to stick with U.S. stocks and real estate for the long haul. Sure, we may have a huge home bias in our investing picks, but betting against the American can-do spirit isn’t wise. We have a knack for adapting to challenges and coming out stronger, and that resilience should see us through to brighter days ahead.
Stocks can rise and dive unexpectedly, which is why adding private real estate to your mix can help smooth out the bumps while boosting your wealth. Platforms like Fundrise make it easy to spread your investment wings without the hassles of directly owning rental properties. For those looking for a more hands-on approach, CrowdStreet offers a chance to dig into individual real estate opportunities in up-and-coming 18-hour cities. These cities are ripe for growth and have solid economic foundations for investment.
I’ve got a chunk of change riding on real estate crowdfunding, aiming to broaden my portfolio beyond pricey SF properties and score some sweet passive income. The plan is to keep on funneling cash into private real estate deals for the long haul and build up the security and value of my investments.
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