Why the Market Now Likes Rate Hikes: They Don’t Hurt Stocks

History shows anything short of Volcker-style shock tactics is a plus for equity prices, CFRA says.

How times change. The Federal Reserve is tightening, and stock investors are happy about it. Maybe, in part, that’s because they think higher interest rates will help equities.

Not long ago, news that the Fed was sticking to its accommodative policy—near-zero interest rates and huge bond buying—buoyed the stock market. The market’s rise today and Wednesday, over the Fed’s reversing that stance, is a sea change: The S&P 500 increased 1.6% yesterday and was up 0.23% this morning.

Of course, what’s changed in investors’ mood is the onset of serious inflation, which Fed Chair Jerome Powell had until recently dismissed as “transitory.” But also, the market doesn’t think policy tightening will hurt stock prices much. Most likely, if history is any guide, the opposite will occur.

In fact, history shows that prior Fed tightenings led to minor price increases for stocks over the ensuing year, according to Sam Stovall, CFRA’s chief investment strategist. Since 1946, the Fed launched 17 rate-tightening cycles, and 13 of them consisted of three or more rate increases, with nine occurring within a 12-month period.

From the date of the first rate hike until the third, the S&P 500 rose a median of roughly 3.5% and gained in price 56% of the time, Stovall wrote in a research note. Of course, huge rate jumps are no friend of stocks, as the early 1980s showed: Then-Fed Chair Paul Volcker jacked up rates to the skies to fight the era’s double-digit inflation.

But that’s not the case today. Minor rate increases suggest the economy is doing well, many analysts have pointed out.