Consumers breathed a sigh of relief when inflation numbers were published for June 2023. After two years of rising prices, the inflation rate finally stabilized at around three percent. However, some economists and market experts question the methods used to get inflation under control.
Over the course of 15 months, the Federal Reserve increased interest rates 10 times in an effort to tame inflation. The increases took the Fed’s benchmark rate from practically zero to more than five percent. In response, the stock market dropped – particularly in the technology sector.
The Nasdaq, which is home to proportionally more tech stocks, lost more than 33 percent of its value in 2022 as anxious investors abandoned high-risk growth stocks in favor of safer alternatives.
The Federal Reserve didn’t increase interest rates further at its most recent meeting, but that doesn’t mean the pause is permanent. If inflation doesn’t hit the Fed’s target of two percent, higher interest rates could be on the horizon.
That possibility has worried investors wondering how long it takes for the market to fall after interest rate hikes. Specifically, will the stock market go down in 2023 and 2024?
What Happens To The Stock Market After Interest Rate Hikes?
Whether and how the market will move short-term is unpredictable. Even the world’s best investors get it wrong a good portion of the time. That phenomenon is due, in part, to the fact the investors don’t always behave logically. In many cases, they follow the crowd. They buy hot stocks that are getting social media attention, even when fundamental analysis doesn’t support the price of shares.
Alternatively, it’s common to see sharp selloffs after a bit of bad economic or company-specific news, even if the stock is well-positioned to recover from challenges. Investors see share prices dropping and lose their nerve. Only the most disciplined manage to hold their ground and ignore emotions when making their trades.
Rising interest rates typically prompt a drop in the market because a certain pattern plays out. Shareholders know that higher interest rates mean higher expenses for corporations – particularly those that heavily rely on debt.
Growth companies fall into this category, so they are prime candidates to sell. Large investors close out their positions, pushing share prices down, and that sends other investors into a panic. They sell, too, and the cycle continues for a period before reversing.
To date, most companies have recovered from the short-term effects of the 2022/2023 rate increases. Does that mean that the short-term drops and fast recoveries observed over the past 15 months are the only consequence of ten consecutive interest rate increases?
Has the danger of recession passed?
What Will The Stock Market Do In 2023?
Business news media and online market experts make their living by publishing stock predictions – sometimes for individual companies and other times for the market as a whole.
At the moment, opinion is divided when it comes to what the stock market will do in 2023 and 2024. There is a contingent telling their followers and clients what they want to hear: the economy is humming along, inflation will continue to drop, and the Fed will begin lowering interest rates
. It will be a “soft landing” – or at most, there will be a bit of an economic slowdown that will be virtually painless.
That may be true, but the facts suggest the near future isn’t quite so rosy. An opposing group of analysts believe that a recession is still inevitable, and in fact, the full impact of 15 months of interest rate increases is just beginning to show itself.
Their economic predictions are based on more than 70 years of data that illustrate the relationship between interest rate increases and economic declines.
1969 – 1970
Interest rates peak in May 1969
Recession begins in December 1969 (8 months later)
Market bottoms out in June 1970 (13 months from peak interest rate)
Peak to trough decline: -39 percent
1973 – 1974
Interest rates peak in July 1973
Recession begins in November 1973 (5 months later)
Market bottoms out in September 1974 (14 months from peak interest rate)
Peak to trough decline: -55 percent
1980 – 1982
Interest rates peak in December 1980
Recession begins in July 1981 (7 months later)
Market bottoms out in July 1982 (19 months from peak interest rate)
Peak to trough decline: -33 percent
1989 – 1990
Interest rates peak in March 1989
Recession begins in July 1990 (16 months later)
Market bottoms out in October 1990 (19 months from peak interest rate)
Peak to trough decline: -30 percent
2000 – 2002
Interest rates peak in June 2000
Recession begins in March 2001 (9 months later)
Market bottoms out in September 2002 (27 months from peak interest rate)
Peak to trough decline: -49 percent
2006 – 2009
Interest rates peak in July 2006
Recession begins in December 2007 (17 months later)
Market bottoms out in February 2009 (31 months from peak interest rate)
Peak to trough decline: -53 percent
Analysis of the data shows that the average number of months from the peak interest rate to the start of a recession is ten. The average amount of time between the peak interest rate to the bottom of the market is 21 months, and the total peak to trough decline is -43 percent.
Assuming that the most recent rate increase was the last – and there is no guarantee that it was – the future of the market might look something like this:
2023 – 2025
Interest rates peak in May 2023
Recession begins in March 2024 (10 months later)
Market bottoms out in February 2025 (21 months from peak interest rate)
Peak to trough decline: -43 percent
However, the Federal Reserve has signaled at least one and possibly two more increases later this year. If those increases occur, the timeline may be extended, but it is unlikely that recession can be avoided altogether.
In short, based on historical patterns, investors shouldn’t base their decisions on an assumption that the current bull market is here to stay. But there is no need to panic. As top investors know, the best way to grow wealth is to buy quality companies that can withstand economic ups and downs, then hold onto those stocks for as long as possible. Sooner or later, the market is likely to recover.
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