By Lewis Krauskopf

NEW YORK, (Reuters) – While fears over the Federal Reserve’s hawkish shift combine with geopolitical uncertainty and have pushed the Federal Reserve into a correction. However, historical data shows that tighter monetary policies are often accompanied by strong gains in stocks.

Investors are hopeful that this announcement will bring some good news. They expect the central banks to announce their first increase in interest rates in over three years Wednesday.

The S&P 500 has returned an average 7.7% in the first year the Fed raises rates, according to a Deutsche Bank (DE) Study of 13 hikes cycles from 1955 to 2005

An analysis of 12 rate hike cycles overall by Truist Advisory Services found the S&P 500’s posted a total return at an average annualized rate of 9.4% during the length of such cycles, showing positive returns in 11 of those periods.

In a report, Keith Lerner (Truist’s chief investment officer) stated that equity prices have risen in periods when the Fed funds rates are rising. This is because it is usually paired with rising profits and a healthy economy.

Title: U.S. stock market during rate hike cycles, https://graphics.reuters.com/USA-STOCKS/FED/lbpgnzabbvq/chart.png

Investors worry this year could be harder than others. However, markets face soaring inflation, which is likely to get worse due to surging commodity prices following Russia’s conflict with Ukraine.

Investors are concerned that central bank policymakers may push the economy into recession by raising rates excessively to combat inflation.

Let’s not forget that rate hikes have had an impact on stocks over the short-term. An analysis by Evercore ISI of four hiking cycles found that the S&P 500 fell an average of 4% in the first month following the start of the cycle.

Evercore reported that the benchmark index had risen by 3% and 5%, respectively, six months into their cycle. The average was also higher after 12 months.

Julian Emanuel is senior managing director of Evercore ISI. “The Fed does not want to see a recession, and it usually takes a lot more hiking before the economy can feel the possibility of feeling a recession,” he said.

Emanuel stated that Evercore is in “the midst” of making a near term bottom, which is likely to produce the same six- or 12-month returns as a Fed rate increase cycle.

Title: Stock performance as the Fed starts to hike, https://graphics.reuters.com/USA-STOCKS/FED/klpykbwkjpg/chart.png

Some investors have been prepared for rockiness, as the Fed has begun to loosen monetary policy, after providing huge support to the economy during the coronavirus epidemic.

The S&P 500 has slid more than 10% to start 2022, while the tech-heavy Nasdaq confirmed it was in a bear market, dropping over 20% from its November all-time high. As the rising yields of bonds have impacted the future cash flows on which stock valuations are based, tech and growth stocks have performed poorly.

Title: Growth underperforms value, https://fingfx.thomsonreuters.com/gfx/mkt/zgpomzgjmpd/Pasted%20image%201647373431666.png

Morgan Stanley Michael Wilson, equity strategist for NYSE:, said that if “the Fed is successful in orchestrating an economic soft landing”, it will raise rates next year. That could result in much higher bond yields that would “just weigh on equity values.”

Wilson stated in a note that “the bottom line is that the Fed will start removing punch bowls this week.”

Equity investors need to know how much rate increases they can get despite slowing growth and the additional shocks from war.