On April 12th, US CPI and the minutes of the March FOMC meeting were released. After the two key events, the pricing of Fed rate futures and the Wall Street investment banks led by Goldman Sachs' chief economist Jan Hatzius all generally expect that the Fed will raise interest rates for the last time at the May FOMC meeting.
So what has been the performance of US, Hong Kong, and other major global asset classes before and after the last time the Fed raised interest rates in history?
The following chart shows the 16 times the Fed has raised interest rates for the last time since 1971. In the year following these events, the US economy has gone into recession 8 times and not gone into recession 8 times. Therefore, we will first look at the historical performance analysis of these two situations.
I. $S&P 500(.SPX)$ performance before and after the last rate hike in history
If the US economy enters a recession within a year after the last rate hike by the Fed, $S&P 500(.SPX)$ generally experiences a significant decline during this period.
Source: Bloomberg
Note: The horizontal axis represents the number of natural days from the last rate hike.
If the US does not go into recession within a year after the last rate hike by the Fed, $S&P 500(.SPX)$’s performance during the following year is mostly a steady upward trend, with the exception of the famous "Black Monday" on October 19, 1987, which caused the S&P 500 index to plummet more than 20% that day.
Source: Bloomberg
Note: The horizontal axis represents the number of natural days from the last rate hike
II. Average performance of US and HK stock indexes before and after the last rate hike in history
If the US enters a recession within 1 year, the average return of US stocks in the following year is negative, while the average return of Hong Kong's Hang Seng Index $HSI(HSI)$ is still positive:
Source: Bloomberg, data period from January 1971 to present
If the US does not go into recession within 1 year, the average return of US and Hong Kong stocks in the following year is particularly good:
Source: Bloomberg, data period from January 1971 to present
III. Performance of US stock sectors before and after the last rate hike in history
Due to data limitations, our statistics on the performance of US stock industry sectors and other assets began in this century. Before and after the last rate hike by the Fed, the financial and utility sectors of US stocks performed the best.
Source: Bloomberg, data period from January 2000 to present
IV. Performance of major global assets before and after the last rate hike in history
The last rate hike means that short-term interest rates have stopped rising, so the performance of US bonds has been generally good since then.
Source: Bloomberg, data period from January 2000 to present
However, in the three times the Fed has raised interest rates for the last time since this century, commodity performance has varied significantly.
Gold futures $Gold - main 2306(GCmain)$ and energy commodities represented by crude oil $WTI Crude Oil - main 2305(CLmain)$ performing the best, industrial metals represented by copper performing decently, and agricultural products performing poorly. Apart from that, the US dollar performed only moderately.
Source: Bloomberg, data period from January 2000 to present
V. Conclusion
The last rate hike by the Fed means that monetary policy tightening has basically come to an end, and the market's focus will shift from from cost of capital to fundamentals.
Therefore, we need to closely monitor various data points closely related to the direction of the US economy towards recession, assess whether the US stock market has fully priced in the future EPS decline, and decide whether to bottom US stocks.
Relatively speaking, after the last interest rate hike by the Federal Reserve, the assets that benefited the most were gold and US Treasuries.
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