Most investors expect stocks to slump as rates rise.
This assumption makes sense… As I covered yesterday, higher rates mean stocks will face more competition from other assets, like bonds. That means less demand, and lower prices.
But what if I told you this story doesn’t play out exactly like you’d expect?
Stocks will crash as a result of rising rates… eventually. But the “eventually” is the important part.
Today, I’ll show you how things have gone in the past, and what it means for the rate-hiking cycles we’re about to see play out.
Folks think that the first hint of higher rates is a bad thing. That’s because ultimately, rate hikes do come before major stock market crashes…
The key is, that initial kickoff doesn’t spell immediate disaster. We’ve seen this play out over and over again in the past.
Let’s start by looking at the late 1990s. The Federal Reserve began hiking rates in June 1999. It went on to hike rates five more times before the S&P 500 Index finally peaked in September 2000.
Importantly, the S&P 500 rallied another 12% from the initial rate hike in 1999 to its eventual peak. Check it out…
The first Fed hike wasn’t a dagger to the heart. While the S&P 500 fell shortly after, it went on to even higher highs over the next 15 months.
This isn’t unique to the late 1990s. A similar scenario took place before the 2008 financial crisis…
In 2004, as the economy was recovering from the 2001 recession, the Fed started pumping the brakes. It saw the economy was heating up. And when the Fed steps in to make sure the economy doesn’t overheat, rate hikes are its go-to tool.
The central bank raised rates in June 2004. But if you remember the boom that came next, you know that was nowhere near the eventual peak. U.S. stocks rallied for years after that rate hike. Take a look…
There were 17 rate hikes from June 2004 through mid-2006. And the S&P 500 rallied the whole time. Investors could have locked in 46% gains before stocks peaked in October 2007.
You can see it’s not the initial rate hike you have to worry about. It takes a while for the market to digest what’s happening and re-price the stock market.
Right now, that means that if the Federal Reserve bumps up rates in early 2022, it won’t be the final nail in the bull market’s coffin. In fact, you don’t need to worry about the initial rate hikes at all.
Stocks can – and likely will – keep soaring after the Fed’s first rate hike. History proves it.
This bull market won’t last forever… They never do. But we still have time to make money before things turn over. That means you want to stay long stocks now.
Good investing,