The Fed is expected to raise interest rates several times this year, with Fed Chair Jerome Powell on Tuesday noting that this would likely happen by March.
The market inched lower in December and despite starting 2022 higher, anxiety about Fed’s tightening hit again last Wednesday after the FOMC minutes from the last meeting.
With the central bank looking to battle rising inflation with interest hikes and an accelerated tapering, jitters saw a broader sell-off led by tech stocks.
There has been a decent bounce on Wall Street as well as other stock markets this week though. But there’s still the expectation that a tightening Fed would spell some sell-off pressure for stocks.
Fed’s rate hikes don't end bull markets
Fundstrat Global Advisors’ Tom Lee says the interest rate hikes will not see the bull market that has recently propelled stocks come to an end.
Rather, Lee believes the market should be ready for a 10% sell-off in stocks before a fresh rally ensues. He said this in a note on Tuesday, stating that the Fed's first interest rate hike in March would be followed by significant moves for the stock market.
Stocks have declined on average 10% since 1990, with the most pain after a “first hike" coming in 2016 when markets bled 15%.
In comments cited by the Insider, Lee said it’s “very likely” that equities will see a similar move as markets adjust to the liquidity shift that comes with Fed rate hikes.
S&P 500 to hit record 5,000 before first rate hike in March
Lee earlier predicted that the S&P 500 would rally over 11% in 2022 to breach the 5,000 points mark. He still holds the view, also recently noting that the S&P 500 could gain over 313% over the next five years.
As for the current bull market, he says a fresh rally could help the index reach a new record. In his view, this could happen even before the first rate hike expected in March.
Stocks bounced higher on Tuesday after Powell said a reduction to the Federal Reserve’s balance sheet wasn’t imminent, but added that the central bank would use all available tools to fight inflation.