S&P500 - Fed interest rate correlation… The US Federal Reserve increased the interest rate by 25 basis points on 16.12.2015 and entered into an rate hike cycle that lasted for about 3 years. It ended the interest increase by increasing the last interest on 19.12.2018. In this period, S&P500 index increased by 21.25%, Nasdaq index increased by 35.59% and Dow Jones index increased by 30.98% in 3 years (Fed increased interest rates from 0.25% to 2.5%).

 

Rate hikes… It seems that the Fed will raise interest rates as long as it thinks the economy can handle higher interest rates. While FOMC projections predict 6 more rate hikes for the remainder of this year, Powell's latest statements show that we may see 50 basis points increases depending on the situation. Considering that the CPI is at the peak of the last 40 years with 7.9%, it is very likely that it will create an effective ground for intervention by using monetary policy, and at this point, it will want to manage inflation expectations at a manageable level by controlling the money supply. This perspective shows that it is inevitable that interest rates will increase. The tight job market and momentum in economic growth from previous periods make it easy for the Fed to hawk against inflation.

 

Comparison of changes in Fed funding rate with S&P500, Nasdaq, Dow Jones Source: Bloomberg

 

Conclusion? It is assumed that there is an inverse relationship between interest rates and stock performance. The underlying perspective is that rising interest rates reduce investment propensity, potentially limiting firm profitability through financing costs, and lowering valuations. When the performance of US stocks is compared with the interest rates, it is seen that there is no serious decrease as long as the profitability expectations of the firm are maintained. If the economy goes into a recession cycle, the equation here could of course change. Therefore, the cyclicality of the economy in the last period is more decisive in terms of firm performances, rather than the cyclicality in interest rates.

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