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How US stock markets reacted to the Fed interest rate hike

A reasearch by Stefano Francesco Fugazzi (ABC Economics) – Last March ABC Economics assessed the US stock market’s reaction to interest rate hikes (LINK). For months general consensus was that Fed Governor Yellen was going to increase rates by the end of 2015. On 16 December the Governor announced the first hike since 2006. As anticipated by ABC Economics, they increased by 25 basis points.

Whilst reviewing the last 24 rate increases, that is between 1 February 1995 and 29 June 2006, we observed that:

  • Relative to the 1995-2006 period, on average the NASDAQ 100 outperforms the S&P 500 and the NASDAQ sub-indexes.
  • Within the dataset we observed that interest rate increases generated higher positive variations in the years preceding the dot-com bubble burst. On average the NASDAQ 100 yield a +3,35% return over a 2-day horizon between February 1995 and March 2000.
  • The average returns were non-significant (+0,02% overnight change) or negative (-0,22% 2-day horizon) post-2000.

fed2

Based on the above, we concluded that we expected US stocks to  yield null or negative returns over a two-day horizon:

fed1

Guess what? This is exactly what happened!

fed3

The reader will notice that over the two day horizon stocks were largely unaffected by the announcement, with all the indexes recording non-material movements.

Consistently with previous observations, the NASDAQ 100 outperformed the S&P 500 (+0.02% versus -0.07% over the 2-day period).

 

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