Authored by Simon White, Bloomberg macro strategist,
US, European and EM stock markets typically begin to rise at a faster rate after the Federal Reserve has finished hiking rates.
There’s a line in Oliver Stone’s era-defining Wall Street where Charlie Sheen’s character calls up a newspaper to goose a stock higher, telling them:
“Blue horseshoe loves Anacott Steel.”
Well, it also seems that equities love the end of Fed hiking cycles.
And not just US equities. European and to a lesser extent EM stocks also typically perform well once the Fed has stopped tightening rates.
In fact, the end of the Fed hiking cycle is almost more consequential for European equities than their US counterparts. The median return of the Euro Stoxx after the last Fed hike over the following year is about 20%, about the same as the S&P.
The S&P has tended to move sideways in the run-up to the last Fed hike, but then steadily rise after.
This time of course the S&P is already up about 12% over the last year. But still, as has happened this cycle, it is the largest stocks that have historically driven the post-tightening rally.
EMs join the party too, even if it’s with a little less alacrity. Their median move has involved a selloff before the last Fed hike, and then a steady rise afterwards, if slower than DM equities.
But there is much more upside skew in EM. As the chart below shows, the 80th percentile return of the MSCI EM in the year after the last Fed hike is over 50%.
One thing we won’t know until after the fact is when the last Fed hike is.
The market is leaning in the direction that the July rate raise was the last, with only a 40% chance of another hike priced. We also have the wrinkle this time with ongoing QT and huge Treasury issuance.
US stocks especially are looking a little frothy. EM has enjoyed a good rally recently, while European equities have been lagging.
Nonetheless, from a historical perspective, the Fed nearing the end of its rate-hiking cycle has been a positive for global stock markets.