Beware of Rising Rates…

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Big Data Investor
Using Kensho technology, CNBC will surface research and analytic insights designed to create actionable, historical content around market moving events.

Rates up, stocks down?

The Federal Reserve kicks off its two-day meeting on Tuesday – the conclusion of which is widely expected to result in higher rates.

A strong job market, second quarter GDP growth of better than 4 percent and an inflation rate in the Fed’s sweet spot, all likely pushing the nation’s Central Bank to take rates higher. A quarter-percent hike would translate to a fed funds rate in the range of 2-2.25 percent. According to the CME FedWatch Tool, the probability of a rate hike at next Wednesday’s FOMC meeting is well over 90 percent.

Since the beginning of the current US fed rate hike cycle, which began December 2015, the markets tend to sell off following a rate hike. The S&P has dropped by an average of 0.75 percent a week after a rate increase was announced, trading negatively 71 percent of the time. In fact, just 4 out of the 11 sectors average positive returns in that period – with the Utilities sector leading, up 0.7 percent, a positive trade 86 percent of the time.

The worst performing sectors a week after a rate hike: Industrials, Materials and the Financials sectors all drop by an average of more than 1 percent, trading negatively the majority of the time.

Rate Hike update

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