Take a Hike: Rate Hikes and Market Impacts

A slower Federal Reserve tightening cycle is historically more favorable for equities and economic growth than a rapid sequence of rate hikes.

• As of September 8, fed funds futures priced a 60% probability of a 25-basis-point hike at the September 15–16 FOMC meeting, while Schwab leaned toward a hike subject to incoming inflation data.
• Across 18 post-World War II tightening cycles, the S&P 500 gained an average of 18% in the year before the first hike, then suffered average maximum drawdowns of 12% within six months and 14% within one year.
• Fast cycles, defined as hikes at almost every FOMC meeting, produced an average 12-month drawdown of 16%, versus 12% for slow cycles in which the Fed waited at least one meeting between hikes.
• Slow tightening cycles were associated with stronger subsequent economic performance, while two or fewer hikes followed by a cut—the article's “non-cycles”—historically produced the best S&P 500 performance.
• Coincident economic indicators, including payrolls, real personal income excluding transfers, retail and manufacturing sales, and industrial production, have remained resilient, whereas the more manufacturing- and housing-sensitive leading indicators have overstated recession risks.
• Two years after the first hike, nonfarm payroll growth averaged 2.5% in slow cycles, compared with 1% in fast cycles, and the current labor market has not yet entered a full recessionary cycle.

Takeaway: Unless inflation or a major supply shock forces a faster response, Schwab expects the Fed to favor a gradual tightening path, implying that volatility after an initial hike may create accumulation opportunities rather than signal lasting market disruption.