Barclays released a client note on Friday that examined how the S&P 500 has behaved around occasions when the Federal Reserve has reversed an easing cycle and gone back to raising interest rates. The bank's review traces a set of prior instances and isolates patterns in equity performance both ahead of and after the policy turn.
Scope of the analysis
Analyst Venu Krishna at Barclays highlighted that markets are currently assigning probability to the Fed restarting hikes around the end of the year, after the latest inflation readings. Barclays focused on five notable episodes over recent decades that meet its definition of a reversal - namely, a period of rate cuts followed by a pause at those lower levels, and then a resumption of rate increases.
Performance before the policy reversal
In most of the identified cases, Barclays found that the approaching policy reversal did not act as a major headwind for the S&P 500 in the six months leading up to the event. In other words, equity returns were largely not derailed in the immediate lead-up to the Fed shifting from an easing stance back to tightening.
Performance after the first hike
By contrast, Barclays reports that the period after the first hike following the hold was generally less favourable for equities. The bank states that returns were "typically quite muted," averaging a low-single-digit downside. Across the five episodes examined, the downside hit rate - defined over windows ranging from two weeks to three months after the initial post-easing hike - was three to four occurrences out of five.
Context for investors
These findings come as market participants weigh the possibility of a renewed hiking cycle in light of stronger-than-expected inflation prints. Barclays' historical review suggests a distinction between the buildup to a reversal and the aftermath of the first tightening move: the former has not consistently harmed S&P 500 returns over the six months prior, while the latter has been associated with a higher incidence of muted or modestly negative returns in the short to medium term following the restart of hikes.
Key takeaway
Barclays' analysis offers a data-based perspective for investors considering the timing and potential market effects of a Fed policy pivot from easing back to tightening, emphasizing that risk to equities has tended to rise immediately after the first hike rather than in the lead-up to the shift.