Looking back at the Fed's pause in interest rate hikes in June, you can find such a magical scene: the performance of the US stock market and the US dollar has hardly changed from the beginning of the interest rate hike cycle in early 22.
Broad Market Index Time Travel Back 15 months ago
As of Friday's U.S. stock close, the S&P 500 index gained a five-week streak at 4409 points. When the Fed started its current rate hike cycle 15 months ago, the S&P market closed at 4358. The S&P 500 is now even higher than it was when the first rate hike was made on March 16, 2022.
Generally, the Fed's rate hikes to tighten liquidity, although not a direct factor in the bear market, also lead to a correction in the broader market. In 2022, the sharp correction of US stock markets, especially technology stocks, can confirm this. After the spring rate hike, U.S. stocks sold off and fell into a bear market due to high inflation and rising borrowing costs, and recession predictions spread through the market.
However, in the first half of the year, U.S. stocks rebounded sharply, driven by strong corporate earnings. Wall Street analysts had already sharply lowered their forecasts ahead of the earnings season at the beginning of the year, only to offset pessimism by strong results after companies reported earnings one after another.
According to FactSet, as of the end of May, nearly 80% of U.S. listed companies exceeded expectations in the first quarter, a two-year high.
In addition, driven by the boom set off by ChatGPT, large technology stocks such as the Seven Sisters of US stocks (Apple, Microsoft, NVIDIA, Amazon, Meta, Tesla and Google) continued to rise, driving the index higher. In the first half of this year, the Nasdaq and S&P 500 rebounded and entered a technical bull market.
At present, although Fed Chairman Powell still insists on hawkishness after the June interest rate meeting, the future path of monetary policy has a high degree of certainty, the market generally expects that the interest rate hike is nearing the end, and the Fed's tightening stance can no longer suppress the upward momentum of the market.
Bloomberg quoted experts as saying that in the next 6-12 months, the Fed will become less important, and other global drivers and fundamental factors will play a greater role.
In addition, the impact of macro factors on the stock market has fallen from 83% to 71% since March, the largest three-month decline since 2009, according to Citigroup's model.
The dollar index retreated in sync
At the same time, the strength of the US dollar has also weakened, and the dollar index is currently trading near its April 2022 level, down nearly 10% from its all-time high.
The dollar index, which measures fluctuations in the exchange rate of the US dollar against six major currencies, is more sensitive to interest rate policy and is usually positively correlated with the level of interest rates, that is, higher interest rates push the dollar index up, and vice versa.
This can be observed in the current cycle of rate hikes, which has lasted for 15 months and accumulated 500 basis points. The Fed began raising rates in March '22 and was followed by four consecutive aggressive 75 basis point hikes between June and September. The dollar index rose from about 102 in early June to about 114 at the end of September, a cumulative increase of more than 11%. Other currencies came under tremendous depreciation pressure during this period. It was not until the recent resolution of the debt ceiling crisis and the clear signal from the Federal Reserve to pause interest rate hikes that the dollar index finally retreated.
For now, the market expects two more 25 basis point or one 50 basis point rate hike by the end of the year. But the widely expected recession has yet to happen, the U.S. economy appears to have borne the brunt of rising interest rates, the labor market is resilient, and corporate balance sheets are mostly healthy. Bank of America strategists in their latest report raised their outlook for the U.S. stock market and became increasingly optimistic about the economic outlook, predicting a relatively mild recession in the event of a recession.
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