Last U.S. Federal Reserve hike tends to aid stocks, but some have doubts this time

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After Federal Reserve raised borrowing costs by 525 basis points since March 2022, many investors believe that policy-makers are unlikely to raise rates any further

The end of the Federal Reserve’s rate hiking cycle has generally been a good time to own U.S. stocks, but an uncertain economic outlook and stretched valuations could dampen upside this time around.

Investors with a more bearish view, however, say it is only a matter of time before higher rates tighten economic conditions and bring a downturn. The S&P 500 is already up over 16 per cent this year, aided in part by a U.S. economy that has stayed resilient in the face of higher interest rates. Though most investors believe a recession is unlikely in 2023, a slowdown next year remains a possibility for some market participants. One worrying recession signal has been the inverted Treasury yield curve, a market phenomenon that has preceded past downturns.

“If Wall Street comes to the conclusion that the Fed has ended its rate tightening program, that would at least offer support if not give [stocks] an additional catalyst to keep working higher,” said Sam Stovall, CFRA’s chief investment strategist.

 

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