To The Moon

On Wednesday, the Fed's $4.025 billion purchase was its last Treasury purchase in the current QE plan, while MBS purchases will stop this weekend. It’s meaningful because this QE scale is much larger than previous data and the QT schedule will also accelerate. 

The QE tapering indicates the beginning of rate hikes. Market forecasts of fed rate hikes have been adjusting and currently are generally expected a 25bps rate hike in March.

Most of the large institutions expect 25bps in March:

• Morgan Stanley now expects the Fed to deliver six 25 bps hikes this year.

• UBS forecasts 25 bps increases in March and June, then "a potential shift toward an every meeting hike pace".

• Goldman Sachs said it is raising its forecast to include seven consecutive 25 bps rate hikes at each of the remaining FOMC meetings in 2022 from a previous expectation of five hikes.

The Influence on the Stock Market

Deutsche Bank Research found through a review of market changes after historical Fed rate hikes: economic growth usually remains strong in the first year of the  rate hike when inflation and the stock market continues to rise; in the second year, economic growth begins to slow down.

After a rate hike cycle begins, stock indexes change similarly to bond yields: they usually start to move lower from the 9th months-1 year after the first rate hike.

The average price of the S&P 500 tends to have a solid increase in the first year of a rate hike cycle, with an average return of 7.7% after one year.

On average, over the 13 rate hike cycles, the S&P 500 has not returned positively on average for 9-10 months after the start of the cycle, but after two years of tightening, the index began to rise.

Opportunity

Standard Chartered Bank's wealth management team pointed out that the decline in US tech stocks has been significantly reduced compared to the beginning of this year. Some tech stocks, supported by excellent earnings, have more investment value.

Conclusion

The interest rate hike will not have much impact on the stock market this year but does bring us more uncertainty. Currently, the market has priced in hike expectations. Many previously plummeting tech stocks are likely to rebound slightly after the hike policy lands, such as $Tesla Motors(TSLA)$. But the most important thing about stock is to look at the fundamental of the company. And most importantly, there are so many uncertain factors in the stock market: the CPI released tonight may impact the Fed's actions; the Russia-Ukraine War also changes every day.

What's your opinion towards Fed rate hike?

Are you bullish on tech stocks?