Due to high price growth, the Fed may raise interest rates more in 2022, than planned. History shows, that even during such periods of tough politics, stocks often rise, than fall.
The statistics are not in favor of the bears
MarketWatch calculated, what return since 1989 has shown S&P 500 during rate cuts and hikes. So, during periods of policy easing, the index rose in four cases out of six, during periods of tightening - in four cases out of five.
Despite positive statistics, not at all necessary, that in 2022, stock investors will also receive a double-digit return. The current situation differs from the previous ones not only in the shortage of supply and the level of inflation, but also high share prices. So, forward P / E S&P 500, or the ratio of capitalization to future profits, at the end of 2021 was 21,2. This is well above the average for 25 years of value in 16,8.
Probably, companies without profits will suffer more than others from the increase in rates. In a growing market, they can raise money, issuing new shares at high prices. But in the case of cheap shares, such companies will have to borrow, and at a higher percentage, given the increase in rates.
ARK Innovation fund is a good benchmark here., which in 2022 has already fallen in price by 15%. A large share of the fund is occupied by shares of Teladoc, Spotify, Unity, Exact Sciences и Twilio. All these companies are unprofitable, and their shares 4 January lost in value from 4 to 18%.
Yield S&P 500 during rate cuts
| May 1989 — February 1994 | +50,0% |
| July 1995 — March 1997 | +44,5% |
| September 1998 - June 1999 | +28,9% |
| January 2001 - June 2004 | −11,5% |
| September 2007 - December 2008 | −41,2% |
| July 2019 - January 2022 | +56,2% |
+50,0%
Yield S&P 500 during rate hikes
| February 1994 - July 1995 | +13,8% |
| March 1997 — September 1998 | +32,6% |
| June 1999 - January 2001 | −5,0% |
| June 2004 — September 2007 | +30,0% |
| December 2008 - July 2019 | +233,1% |
+13,8%
Inflation breaks records
In December 2021, the US consumer price index rose by 7% - maximum for the last 40 years. In January the chapter FED Jerome Powell stated: if prices keep going up, the central bank will raise interest rates more aggressively, than expected.
For about a year, Powell called inflation temporary.. According to the bank, prices rose not because of soft policies and zero rates, due to high demand and lack of supply, caused by disruptions in production and logistics.
Now Powell admitted: and supply-demand imbalance, and the regulator's policies led to high inflation. By increasing the interest rate on loans and deposits, The Fed will be able to motivate consumers to save more, rather than spend. But a tougher policy is hardly capable of solving problems with production..
"We can influence demand, but not by suggestion. Inflation is a combination of both.", Powell said.
Following the meeting in December 2021, the Fed announced, that in 2022 it can consistently raise the rate to 0,9%.
